How to reduce taxes for UK companies legally?
Businesses operating in the United Kingdom can take advantage of various tax incentives that allow them to reduce their tax burden and increase profitability. In this article, we will discuss the main ways to legally optimize taxes.
Key tax breaks for UK businesses
The UK government offers several tax breaks to encourage business development:
• Corporate tax relief: Companies can deduct certain business expenses from their taxable profits, thereby reducing the amount they pay.
• Annual Investment Allowance (AIA). Allows deductions of up to £1 million per year for equipment, technology and vehicles.
• Research and Development Tax Credits (R&D Tax Credits). Intended for companies investing in innovation. Small and medium-sized enterprises can deduct up to 186 percent of expenses related to scientific research.
VAT optimization
From 1 April 2024, the VAT registration threshold in the UK has increased from £85,000 to £90,000 per year. This means that businesses with a turnover above this amount in any 12-month period must register for VAT.
The main methods of VAT optimization:
• Take advantage of the Flat Rate VAT Scheme if your business turnover does not exceed £150,000. This can reduce the amount of VAT you have to pay.
• Ensure proper accounting of business expenses to enable VAT recovery on goods and services.
• Apply VAT rates appropriately when exporting goods or services to the EU and other markets.
Practical example
An IT company has invested £50,000 in new server infrastructure. By taking advantage of the Annual Investment Allowance (AIA), it can deduct the entire amount from its taxable profits, thereby reducing the tax it pays.
Another company developing a new product invested £100,000 in research and development. It took advantage of the R&D tax credit and recovered £24,700 in tax relief.
To reduce taxes legally, it is necessary to take advantage of available benefits and optimize accounting processes. Every company can find the right strategy that allows it to effectively manage the tax burden and invest in growth. If you want to learn how these measures can help your business, it is worth consulting with specialists.
Dividends or salary: which method is more profitable for business owners in the UK?
UK business owners often face the question: how best to distribute income – through salary or dividends? Choosing the right strategy can optimize taxes and increase the total amount received.
Salary: stable, but with higher taxes
The salary is subject to Income Tax and National Insurance Contributions (NICs). Key aspects:
• The salary provides social guarantees, such as state pension, sickness or maternity benefits.
• Employer costs are higher because an additional social security contribution must be paid (13.8% above a certain threshold).
• Income tax is progressive, meaning the higher the salary, the more taxes are paid (20%, 40% or even 45%).
Dividends: lower taxes, but no social guarantees
Dividends are paid from a company's after-tax profits and have the following advantages:
• Lower taxation – the first £500 of dividends per year are tax-free, and then lower rates apply (8.75%, 33.75% or 39.35%).
• No need to pay NICs, so the overall tax burden is lower.
• Dividends can be paid flexibly, depending on the company's profits.
Which option is best?
The most optimal strategy is often a mixed option:
✔️ Pay the minimum wage to stay on social security but not pay NICs.
✔️ Pay out the remaining amount as dividends, thus reducing the overall tax burden.
This method allows you to maximize tax benefits and increase the business owner's income. However, it is always worth consulting with a specialist to ensure that the chosen solution is optimal for your individual situation.
Is it worth registering for VAT if your turnover has not yet reached the £90,000 threshold?
In the UK, businesses are required to register for VAT when their turnover reaches £90,000 in a 12-month period (from April 2024). However, some businesses choose to register voluntarily even if they have not yet reached this threshold. Is it worth it?
When is it worth registering for VAT voluntarily?
✔ If you work with other VAT-registered companies – business customers can reclaim the VAT you apply, so your prices will not be higher for them.
✔ If you purchase a lot of goods or services with VAT, you will be able to reclaim the VAT on purchased goods and services, thus reducing business costs.
✔ If you want to look more solid – VAT-registered companies sometimes seem more reliable to business partners.
When is it not worth registering?
❌ If you work with residents (B2C) - for individuals, VAT is an additional cost, so your services or goods may become more expensive than those of your competitors.
❌ If your business expenses are low – if you don't purchase many goods or services with VAT, the benefit of a refund may be minimal.
❌ More administration – VAT registration means additional accounting and declaration duties.
What to choose?
If your customers are other businesses and you have a significant amount of VAT expenditure, voluntary registration may be beneficial. However, if you work with end-users and want to maintain competitive prices, it may be worth delaying VAT registration until you reach the mandatory threshold. Before making a decision, consult an accountant or financial advisor who will assess your situation.