Tax tips for small businesses

Are you starting a new business? Get ahead in your accounting and learn our tax tips for small businesses. 

We’ll cover the main pitfalls that small businesses face in their accounting and give you essential tips on how to avoid them. Discover our six tax tips for:

• Navigating the tax year 
• Submitting by the deadline
• Avoiding fines
• Paying what you have to
• Taking advice
• Using integrated accounting software

Whether you’ve opted to become a sole trader or a limited company director, learn our key tax tips for small businesses to help you grow faster and stay compliant while doing so.

Our first tax tip is about knowing how your taxes change depending on your accounting method.

Depending on your business and turnover, you’ll either use the cash or traditional accounting method. Each has a critical bearing on your tax liability and the cash flow you’ll use to pay it. This is because they differ in the amount you’ll then use to calculate your taxes. 

Cash accounting records income and expenses as and when they’re paid and is considered a more straightforward way of handling your accounting. Using this method, your tax liability will refer to the exact amount of income and expenses your business has incurred during this yearly window. If your business has a turnover greater than £300,000, you’ll need to use traditional accounting. Here, your tax liability is calculated on the amount your business is owed using invoices dated within this same yearly period (even if you haven’t been paid yet and may not be for another month).

Regardless of the method you use, it’s essential that you use a consistent method in calculating your business’ income and expenses and account for the cash flow you’ll need to cover your taxes before you pay it.

HMRC requires income tax from Self Assessment to be paid by 31 January following the end of the tax year. For example, tax returns submitted for the 2021-2022 tax year must be paid by 31 January 2023. And so, our second tax tip is knowing how best to meet this deadline.

The cash flow issue outlined above is eased by the deadline being so far away from the end of the tax year. Your business can enjoy some of the time between filing and paying your taxes to sort everything out.

However, if you’d like to have your taxes paid earlier than this deadline, you’ll need to have your business finances ready and the cash flow available earlier to do so. You may wish to do so just to get it off your to-do list and your mind. HMRC offers a free tool to help plan your Self Assessment income tax filings available online.

Our third tax tip is on how to avoid fines. At a minimum, small businesses should at least be able to avoid paying their taxes late and incur fines for doing so. 

As you’re paying, make sure you account for things like bank holidays or the speed of any payments you make to HMRC. The requirement is that HMRC receives the payment by the deadline – it’s not enough to have sent it on your end. Therefore, make sure your payments are successfully received in time in order to avoid fines or interest applied to your initial tax sum. Learn more about your Self Assessment tax bill here.

Our fourth tax tip is knowing what you have to pay. This primarily comes in the form of knowing what you can expense for your business. Costs to your business can grow difficult to keep track of, especially as your business grows and there’s more to remember. Even if you record larger ones or keep detailed receipts, you may still find there are costs to your business that escape your notice. These may include bank charges or business travel.

Your tax liability is calculated on your income. So, if you don’t accurately expense everything you’ve had to pay for your business (and adjust your taxes accordingly), you’re essentially double-paying: once from your income and once again on your taxes. However, this problem also comes in not utilising income allowances properly (for example, with dividends). Make sure to use them to maximise your personal income.

In a similar vein, new business owners can sometimes get confused about which taxes they are liable for. Knowing the difference in tax and operations requirements for sole traders and limited companies can not only keep your financial records more focused, but you’ll also save on unneeded stress about your tax compliance. A simple accounting app like Countingup can help automate your expense process and provide tax estimates to help you understand how much you need to set aside.

Our fifth tax tip is to take advice from the experts. 

Using an accountant can not only ensure your accounting practices and tax bills are accurate and compliant, but you’ll also be able to get advice on growing and financing your business. 

We believe in this point so much we even wrote an entire article about it. Find out more about how an accountant could help you run your business here.

Our sixth and final tax tip is don’t waste time where you don’t have to. Accountants are great, but both of you will be thankful for using simple accounting software like Countingup.

Countingup is the business current account with free, built-in accounting software. Small business owners can gain hundreds of hours back from their financial accounting by using Countingup to automate the boring, time-consuming parts.

Countingup comes with automated invoicing features, a receipt capture tool and tax estimates on your trading. Together, they work so you can manage your business’ finances easily and on the go. Countingup also offers real-time profit and loss statements, so you can see how your trading changes almost instantly.

Vitally, Countingup is also compliant with Making Tax Digital – the tax initiative from HMRC for small businesses affecting VAT returns from 2022 and income tax from April 2023. Using Countingup, you can share your financial information and tax records with your accountant and HMRC easily at the touch of a button.

Gain more insight into your business’ performance and stay tax compliant while trading. 

Find out more about Countingup here and sign up for free today.