The Best Tax Deductions for Small Businesses

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Recent findings indicate that 46% of UK small businesses are not knowledgeable about tax relief that is available from the Government.

The research, carried out by business insurance providers Direct Line, also found that almost 3.5 million businesses lack an understanding of tax schemes which could help them save on their tax bills.

To counterbalance the lack of information regarding tax relief and Government allowances we’ve put together this list of some of the most tax effective government initiatives currently available to small businesses in the UK who would like to take advantage of their current activities to reduce their tax bill.

Annual Investment Allowance

The Annual Investment Allowance allows you to deduct the full value of an item that qualifies from your profits before tax. It is an allowance for capital expenditure on most industrial equipment and machinery in their first year of purchase, however, it excludes cars and parts.

At present, small businesses, partnerships and sole traders may claim this allowance on all allowed purchases totalling up to £200,000 annually but there are annual amendments to this threshold so make sure you understand how much you can claim in your year.

The Enhanced Capital Allowance

The Enhanced Capital Allowance helps businesses claim relief for expenditure on sustainable ‘plant and machinery’ that reduce their carbon footprint.

This scheme, designed to encourage businesses to purchase efficient and energy saving products, allows them to claim 100% of the purchase against their profit as long as the item is in its first year of purchase and is ecological and/or energy saving item. The allowance is applicable to individuals and partnerships for income tax and the same relief is available for larger businesses’ corporation tax.

Employment Allowance

The Employment Allowance became available in 2014 to help business reduce their employer Class 1 National Insurance contributions.

The current allowance, £3,000 per year, is available for businesses and charities that make employers’ NI contributions. It means that employers do not have to pay Employers National Insurance Contributions until the amount they owe exceeds £3,000.

Businesses can claim for the Employment Allowance for more one PAYE staff member but claims can’t surpass the business’ NI liability.

Enterprise Investment Scheme

The Enterprise Investment Scheme was launched in 1994, and is tax effective if you would like to make an investment by buying shares in small businesses.

The scheme encourages investment in new businesses by allowing investors, or businesses making investments to buy shares, to claim back 30% of the investment against their tax bill. The business that is being invested in must qualify as an EIS business before the investor can claim the extra relief.

Profits made using the Enterprise Investment Scheme are exempt from capital gains tax as well as inheritance tax. The amount an individual or business can invest is capped at £1 million per year depending on the company’s eligibility and any losses can be offset against income tax.

Seed Enterprise Investment Scheme

Following the EIS, the Seed Enterprise Investment Scheme was subsequently set up in 2012 to prompt investment into higher-risk start-ups, thusly SEIS better tax breaks than its’ parent initiative.

As with the standard Enterprise Investment Scheme, capital gains and inheritance tax are not payable on profits made using SEIS. However, unlike EIS, the Seed Enterprise Investment Scheme allows investors the claim 50% of tax paid.

To qualify for income tax relief, SEIS benefactors must invest no more than £100,000 in a business less than two years old, the business must be registered for SEIS. 

Research and Development

Research and development tax credits offer relief to businesses for being progressive.

The scheme is aimed at companies that invest capital in developing new goods or services or further developing existing ideas. Businesses which fit this criterion qualify for corporation tax discounts.

Research and development credit rates account for a third of relevant expenses and can help small yet innovative business further their growth and expertise yet 4 out of 5 businesses are unaware that they are eligible for the relief.

We’ve written more on Research and Development Tax Credits to help you find out if you can apply it to your business.

Assistance with Lowering Your Tax Bill

You can contact us if you would like to discuss applying any of the tax relief initiates mentioned in this article to your business.

If none of the above applies to your business but you would like to find out more about how you can lower your own business then call us to speak to one of our accountants or tax advisors today.

We are Cottons Chartered Accountants, a connected accountancy firm with local offices in LondonRugbyDaventry and  Northampton. We offer a fully comprehensive range of tax and accounting and business services for small businesses.