Starting and maintaining a business comes with a laundry list of responsibilities, and these responsibilities can occupy most of your attention. New business owners get preoccupied with staffing, operations, and marketing issues. They forget the things they should also learn about: how taxes work, tax obligations, methods to save money, and ways to maximize profit.
These things can be confusing to entrepreneurs or anyone new to the business environment. And at a time when many businesses are struggling, making use of tax relief can help lighten the load for you and your business.
Tax Credit versus Tax Relief
At first glance, these two phrases can be confusing. Tax credit and tax relief are ways to decrease your tax burden, but there are major differences in how they are applied:
Tax credits are a way for the government to redistribute income to help low-income families. It comes in two types: child tax credit and working tax credit. Child tax credit supports families with children under 16 or young persons aged 16-20. This type of tax credit can be claimed even if you’re not at work. On the other hand, a working tax credit is for people who have low income and is based on hours worked. Those who are either employed or self-employed are eligible to claim this tax credit.
However, these tax credit types are slowly being replaced by universal credit, which benefits the working class. It combines the following benefits into one payment:
- income support
- working tax credit
- child tax credit
- housing benefit
- income-based Jobseeker’s Allowance (JSA)
- income-related Employment and Support Allowance (ESA)
For business owners, tax relief is more applicable. Tax relief allows you to pay less tax based on the amount of money spent on running your business. It can be claimed alongside personal tax allowances that you are eligible for, meaning you’ll be able to enjoy more of your income. Business owners can benefit from claiming tax reliefs and recoup a portion of the tax that they pay, as it can apply to pension contributions, maintenance payments, and charity donations.
Bringing Down Your Tax Bill
Here, we list down a few ways to legally pay less tax and take home a little more of your hard-earned income:
Annual Investment Allowance (AIA)
If the money you spend on buying equipment, refurbishing properties, and installing fixtures for your business comes out of your pocket, they may be considered tax-deductible expenses. These expenses fall under capital allowance, which allows you to reduce the after-tax costs of purchasing these items. Items that are eligible for AIA include cars used for your business, installing “integral features” such as electrical and light systems, security systems, lifts, air-conditioning, and other items you’ve bought for the business.x
For those working from home, you may also be able to claim tax relief on expenses such as heating, lighting, and telephone costs. However, this only applies if you are working from home involuntarily.
As of April 6th, 2020, employment allowance applies to small businesses, charities, and community amateur sports clubs. Eligible employers that pay Class 1 employers’ National Insurance may be entitled to reduce their annual National Insurance liability. Every time you run your payroll, you’ll pay less Class 1 National insurance until either the £4,000 runs out or the tax year ends, whichever is earlier.
Creative Industries Tax Relief (CITR)
Businesses in the creative industry can benefit from tax breaks that reduce certain production costs. The CITR is made up of 8 Corporation Tax reliefs, which are as follows:
- High-end Television Tax Relief
- Film Tax Relief
- Children’s Television Tax Relief
- Video Games Tax Relief
- Animation Tax Relief
- Theatre Tax Relief
- Orchestra Tax Relief
- Museums and Galleries Exhibition Tax Relief
Businesses must pass a cultural test and have their content be certified as British, both of which shall be administered by the British Film Institute (BFI) to be qualified for these reliefs.
Research and Development (R&D) Relief
This relief applies to companies that are making advances in science and technology. The project does not need to be successful for your business to be eligible. However, your project must be related and impact research, development, and innovation in your field. The Department of Business, Energy, and Industrial Strategy (BEIS) also provides guidelines for the definition of R&D for tax purposes, which states the following:
- R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology.
- The activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D.
- Certain qualifying indirect activities related to the project are also R&D. Activities other than qualifying indirect activities which do not directly contribute to the resolution of the project’s scientific or technological uncertainty are not R&D.
If this applies to you and your business, you may be eligible to claim the R&D relief.
Small Business Rates Relief
This relief is applicable for businesses with a rateable value of less than £15,000. This also only applies if you have one sole business property. If you have more than one, you may still be entitled to existing relief on your main property for a year, provided that your other properties do not have a rateable value of more than £2,899 and the total rateable value of all your properties combined £20,000 (or £28,000 in London).
While not all of these reliefs may apply to you, those that do apply to your business will definitely help you keep your business running during these difficult times.