Paying tax is an inevitable part of any adult individual or business’ legal responsibilities. As a business owner, accounting may not be your strong point. But one thing you are certain of is that you need to pay your due taxes on time each year unless you want to fall afoul of the law and even face hefty fines. However, there are some steps you can take to reduce your business’ tax liability. You just need to know how to go about it the right way. This article explores what a tax liability is, how corporate tax is calculated, what dividend tax is and how to lower your tax legally. Let’s explore these topics in a bit more detail.
What is a Tax Liability?
A tax liability is your financial obligation to a state, federal or local government as a business owner. This tax liability is calculated as a percentage of your profits and is usually paid out each year or during a certain quarter before or on a certain date to ensure your legal obligations are covered. According to sources, basically anything that constitutes a tax payment is considered a tax liability and includes but is not limited to income tax, employment tax, capital gains tax as well as past taxes that have not been paid yet.
How is Corporate Tax Calculated?
Although different jurisdictions have different ways of calculating corporate tax, in the UK this is done by dividing your liable profit by 100 and then multiplying the resulting sum by 19 to reach the calculation of 19% on profits for the corporation tax due. This percentage, however, is expected to increase in April 2023 to around 25%.
In Denmark, on the other hand, corporate tax is calculated as 22% of profits earned during a specific tax year.
What is Dividend Tax?
Dividends may be considered additional income for shareholders in companies. When a company makes a profit, this is typically distributed to shareholders in the form of dividends based on their shareholding structure and percentage ownership. Dividend tax is a tax on this particular type of dividend income that is earned and is an additional tax obligation that numerous companies all over the world face.
For individuals resident in Denmark, received dividends are included in a special share income that is taxed at 27% of the first DKK 56,500 of share income and at 42% for the rest. Interest and royalties are included in the person’s taxable income and are taxed in line with other taxable income.
How to Lower Your Taxes Legally
It wouldn’t be an overstatement to say that most business owners would prefer to pay lower corporate tax in order to enjoy and have greater access to what they work so hard towards – building and earning a profit. However, with hefty tax rates throughout many Western European countries, this can be a difficult process. There are, however, some steps you can to reduce your corporate tax. These are outlined in more detail below:
1. Pay yourself
Tax-efficient remuneration should be on your priority list when seeking to lower your tax burden. As the owner or director of a limited company, one step to reduce your corporate tax obligations is to pay yourself a salary or a combination that involves a salary and other types of remuneration. These “other types” should be allowable as business expenses. Remember that the world of remuneration is not equal. Some types are more efficient than others and ensuring you know which one will give you the best results is an important starting point.
2. Claim all costs of sales
In the UK, for example, another way of reducing your corporate tax is to claim expenses that have been incurred “wholly and exclusively” for your business. Examples of such expenses would be the cost of raw materials, operational costs, cost of purchasing products for resale, product storage, distribution and logistics costs, marketing and promotional costs, discounts to retailers, wholesalers and distributors and others.
3. Claim costs of overheads
As a rather broad category of allowable expenses, which cover all the costs involved in running your business, you would be well advised to factor in costs that include your employees wages and salaries, employee benefits (e.g. pension contributions or bonuses), payments to consultants, contract workers or freelance suppliers, communication costs (e.g. telephone bills and broadband), rent and rates for your premises (including maintenance or cleaning costs), energy and utility charges, insurance premiums, bank charges, interest and loan repayments, office costs (e.g. stationery, office supplies and equipment hire), legal, accounting and other professional fees, depreciation for any fixed assets, and travel costs (e.g. train fares, fuel and car repayments and maintenance).
4. Claim work-from-home allowances
If you work in a hybrid work arrangement where part of your work is carried out from your office or premises and other part of your work is undertaken from your home, you can also claim for work-from-home related expenses. This is a slightly tricky field to navigate, especially in the UK, as there are caps to what you can pay in terms of your costs. Keeping receipts as evidence is also crucial.
5. Invest in training and development/research and development
By encouraging a more skilled workforce, you can also train and further develop your employees. These expenses for courses and training can be deducted from your profits as well. Regarding research and development (R&D), you can claim tax relief for assets and materials, overheads related to the research premises, licenses and intellectual property, software and software development, costs of employing research staff (internal and external) as well as contracted research services.
6. Set up a company pension fund
A company pension scheme that is contributed to by both employers and employed can be classified as allowable expenses. These can then be deducted from your profits.
7. Consider moving your business abroad
Comparatively speaking, paying corporate taxes in Western Europe is highly costly and sometimes smaller businesses simply cannot afford this no matter what type of tax deduction efforts they make. To prove this point, we created our very own Tax Savings Calculator, which you can use to see how much you can save on corporate and dividend tax if you registered your business in Bulgaria.
The Bulgarian corporate tax rate is a fixed 10%, which means you can truly capitalise on the opportunity afforded by an attractive tax destination without having to change much or anything about your business at all.
Concluding remarks
At Motion Advice, we understand the complexities of paying corporate and dividend taxes in your country. This is why we can help you save on taxes with a full suite of legal, accounting and business services that makes the entire experience pleasant and hassle-free. Working with our professionals is a true pleasure and not only that but you’ll also be able to gain more access to your profits and enjoy the rewards of your labour. All that you need to do is reach out to us to see how we can help your business thrive, no matter where in the world you may be located.
