You’re launching a start-up! Congratulations!
Launching a new business is an exciting venture, but amongst all the excitement, you’ve got to understand the importance of tax planning. Now, it doesn’t have to be doom and gloom when the tax deadline comes around; effective tax planning makes it easy!
Tax planning is more than just paying your taxes on time—it’s about strategically setting up your finances to ensure long-term success, compliance, and financial stability. At TaxGem, we’re experts in tax planning and guidance, so take a look at our top tips for new businesses to help you navigate your business taxes.
1. Choose the right business structure
The legal structure of your start-up significantly impacts your tax obligations, so choosing the right one is essential. In the UK, common structures include sole trader, partnership, limited liability partnership (LLP), and limited company. Each has different tax implications:
– Sole Trader: Simple to set up, but you’ll be taxed on all profits as personal income.
– Partnership: Similar to sole traders but involves two or more partners, with income tax responsibilities split according to the partnership agreement.
– LLP: Provides limited liability to partners while allowing profits to be taxed as personal income.
– Limited Company: Offers limited liability and a distinct legal identity. Company profits are subject to Corporation Tax, and directors may pay themselves through salaries and dividends, which can be tax efficient.
Choosing the most appropriate structure will depend on factors like the level of risk, desired tax treatment, and long-term goals. Consulting a tax advisor or accountant can help you determine which structure best suits your needs. Take a look here at the government website to find out more about the UK business structures that are best for you.
2. Understand your tax obligations and deadlines
One of the key challenges for start-ups is understanding the various taxes they may be subject to. This includes:
– Corporation Tax: Limited companies must pay Corporation Tax on their profits. Ensure you register with HMRC within three months of starting your business activities.
– VAT: If your taxable turnover exceeds the VAT threshold (currently £90,000), you must register for VAT. VAT registration allows you to reclaim VAT on business expenses but requires careful management of VAT returns.
– PAYE: If you have employees, you’ll need to operate PAYE as part of payroll to handle Income Tax and National Insurance Contributions.
– Self-Assessment: Sole traders and partners must submit a self-assessment tax return annually.
Missing deadlines can result in penalties and interest, so keeping on top of these obligations is crucial. You can use digital tools like accounting software to automate reminders and streamline your tax filing process, whatever works easiest for you. Find out more about tax obligations and deadlines here on the government website.
3. Keep detailed financial records
Accurate record-keeping is the backbone of effective tax planning. Keeping track of income, expenses, receipts, and invoices will not only help you stay compliant but also make it easier to claim allowable expenses that reduce your taxable income. At TaxGem, we know that record-keeping is a common pitfall for start-ups, leading to errors in tax returns and missed deductions. So, keep everything you can, file things away and keep them for later.
To give you a helping hand, you can use cloud-based accounting software like Sage (a TaxGem recommended product), QuickBooks, Xero, or FreeAgent. Platforms like these help you to link bank accounts, track expenses, and generate reports that provide valuable insights into your finances. Keeping an eye on your accounts helps you identify any discrepancies or opportunities for tax savings. This means you don’t get tripped up or miss out.
4. Maximise deductions and allowances
Start-ups can benefit from several deductions and allowances that reduce taxable income. Key areas to focus on include:
– Startup Costs: You can claim certain pre-trading expenses incurred up to seven years before the business started trading. This includes costs like market research, advertising, and legal fees.
– Capital Allowances: If you purchase assets like equipment, machinery, or vehicles, you can claim capital allowances to reduce your taxable profits.
– Research and Development (R&D) Tax Credits: If your business is involved in innovation, you may be eligible for R&D tax relief, which offers significant savings by reducing your Corporation Tax bill or providing cash credits.
– Employment Allowance: If you employ staff, this allowance can reduce your employer’s National Insurance bill by up to £5,000 per year.
These deductions can make a pretty hefty difference to your overall tax liability, so it’s important to identify and claim everything you’re entitled to.
5. Plan your cash flow carefully
Take your cash flow management seriously, as an unexpected tax bill can severely impact your finances if you haven’t planned for them. A good tip is to keep yourself a tax reserve by setting aside a portion of your income regularly to cover future tax liabilities. This approach helps prevent cash flow issues and gives you the peace of mind that you have funds available when your tax payments are due.
Again, you can use platforms for this and use specific cash flow forecasting tools to give you an idea on how much tax you’ll need to pay and plan your finances more effectively. Being proactive avoids any last-minute scrambles to find cash for tax payments and makes things feel a whole lot easier!
6. Seek professional advice
Navigating tax regulations can be complicated, especially for start-ups with limited experience in business finances. Seeking professional advice from a qualified accountant or tax advisor can save you time, money, and stress. And, that’s where some tax-minded helpers, like us at TaxGem, come in. We can offer expert guidance tailored to start-ups, helping you understand your tax position, identify potential savings, and ensure compliance with HMRC.
You always want to find an account that’s the best fit for you. A good accountant will not only handle your tax returns but also provide strategic advice on structuring your finances, managing cash flow, and planning for future growth. Having a professional on hand can help you avoid costly mistakes and make informed decisions that support your business’s long-term success.
7. Stay informed about tax changes
As with all things money, tax regulations are constantly changing, so you’ll want to make sure you stay informed about any changes so you’re keeping compliant and optimising your tax strategy. For example, recent updates to VAT rules or shifts in the Corporation Tax rate can impact your business.
Overall, effective tax planning can really help put your start-up on the path to success. By choosing the right business structure, understanding your tax obligations, keeping detailed records, maximising deductions, and seeking professional advice, you can make sure you’re boxing off financial stability and compliance. Taking a proactive approach to tax planning will put you in a better position to navigate the challenges of early business life and build a solid foundation for growth.
Want to pick our brains and get even more detailed guidance on tax planning for start-ups? Then give us a call or drop us an email… We love chatting! Call us on 01772 971071 or email: hello@taxgem.co.uk
