Inflation in the UK has been a huge talking point within the industry throughout the past year, with many families and businesses struggling with the rise of interest rates. This week, the Bank of England kept the base rate at 5.25% – the highest level it has been in 15 years. However, many did find this surprising, as it was expected to rise even further to 5.5%. A month ago, it was predicted to go as high as 6%.
The BOE raises interest rates to attempt to reduce the UK’s annual inflation rate. This currently sits at 6.7% – the target rate for this is 2%.
The rise in interest rates doesn’t seem to be peaking at 5.25% either. Analysts are predicting it will rise to 5.5% by the end of 2024, then slowly fall over the next 5 years, ending at around 3.75%.
Five years is a long time in business, so what can you be doing to plan going forwards?
What are interest rates?
Interest rates are a measurement of the cost of borrowing money. The interest is the amount charged by the lender on top of the amount of money loaned that needs to be paid back by the borrower. The interest rates charged to borrowers is tied to the base rate that is set by the BoE. Any decision they take has significant knock-on effects for the wider economy.
The Bank of England (BoE) is independent of the Westminster government and acts as a custodian of the UK economy. The Bank’s Monetary Policy Committee decides whether they need to raise or lower the Bank of England interest rate to help stimulate the economy, control inflation and protect borrowers and savers.
What is inflation?
The Bank of England says that low and stable inflation is vital for a healthy economy, where households and businesses can plan for the future with confidence.
Inflation is essentially a measure of how much prices have increased across the economy compared with the previous year. This means that the average cost of household goods (or your ‘shopping basket’) is 6.7% higher today than it was in September last year.
There is logic behind raising interest rates to reduce inflation. It is presumed that higher interest rates will make people borrow less and save more, meaning consumers spend less in the real economy. This then curbs price rises and reduces inflation.
What do interest rate rises mean for small businesses?
Alongside feeling the effects of higher material costs, meaning much smaller profit margins if prices for your goods or services are not raised and passed on to the customer, one of the most serious impacts of rising interest rates on small businesses is that people simply don’t have the disposable income they had before. With everything around us increasing, it doesn’t necessarily mean that people are earning any more than they have previously.
As the cost of borrowing increases, consumers pay more interest on the debt they already have and new debt they take on. Individual consumers will spend more of their income on debt payments and will have less money to spend with your small business.
Tax tips for your small business
The majority of self-employed people start as a sole trader, work hard to get established, build a solid client base and grow their business. Then they incorporate to capitalise on the many benefits and advantages of operating as a limited company.
Benefits include limited liability, which means your personal assets including your home, investments and car should be protected if your business ran into financial difficulties.
Currently, the average interest rate for a 2 year fixed mortgage is 6.65%. If you’re feeling the pinch from all angles, making sure you’re protecting your personal assets is vital.
Other benefits of being a limited company are credibility, being able to claim a wider range of expenses, and increased take home pay. Self-employed people operating through a limited company have scope to maximise their take home pay through efficient tax planning.
At Gorilla Accounting, we’re all about maximising your profits and reducing tax payments. We can guide you through tax reliefs, allowances, and more to help increase your take home. If you think you’re paying too much tax, or would like to pay less, we can help you reduce your tax liability.
Here are just a few of our top tax tips to help you as a small business:
Work With The Right Accountant
An easy way to pay less tax is to work with an accountant who can look at your incomings and outgoings and use their expertise to give you the best advice to leverage all available tax efficiencies and increase your take home pay.
Although this will require you to pay a monthly fee for their services, having the expertise of an accountant in your corner will save you a lot of time and energy handling your accounts and keeping your own records, leaving you time to focus on growing your business.
Gorilla Accounting are expert accountants for small businesses and the self-employed. We can provide expert advice to reduce your tax liability as well as preparing and submitting key documentation to HMRC. We know how to best maximise your profits so that you’re paying only the amount of tax you should pay to HMRC, and not a penny more.
Our fixed-fee pricing structure is transparent so there are no surprises when it comes to your monthly fee. Plus, with Gorilla Accounting, you’ll get your own dedicated accountant, full inclusive access to market-leading FreeAgent accounting software and a same day response to any query submitted on a working day before 3pm.
Tax-Efficiency
Operate through a limited company and you’re outside IR35? The good news is you have more control and flexibility to pay yourself by structuring your remuneration. You can do this through a combination of salary and dividends.
Dividends are company profits that are distributed between the shareholders of a company. If you’re the only shareholder in the business, the dividends are all yours!
Dividend tax rates are lower than income tax rates. You can pay yourself a small salary and make up the difference in dividends, cutting down your income tax and National Insurance contributions.
It’s important to retain funds in the business and not withdraw all dividends each month, as this can also help you to pay less tax as it could keep you in a lower tax band. It also means you have a buffer within the business month on month.
Give to Charity
If you’re looking to support a local charity or want to get involved in the community, you can pay a reduced amount of corporation tax when you make donations to charity. This can be through money, shares, property, equipment or land. The value of the donations are deducted from company profits before tax is applied.
Donations can be made through personal contributions or Gift Aid. This tax relief is available to sole traders, partnerships and limited companies, but records of any donations made will need to be kept if you intend to take them off your taxable income.
Make Contributions To Your Pension
Trim the amount of tax you pay as a limited company owner through pension contributions.
Pension contributions are classed as an allowable expense, enabling you to lower the amount of corporation tax you pay. You can contribute up to £40,000.
Utilise the Flat Rate VAT Scheme
Many self-employed people operating outside IR35 use the Flat Rate VAT scheme. This scheme is in place to make it simpler for small businesses to charge and reclaim VAT, as it removes part of the admin burden associated with registration.
Through the flat rate scheme, a fixed rate of VAT is paid to HMRC and you keep the difference between what you charge to your customers and what you pay HMRC.
VAT can’t be reclaimed on purchases with the exception of specific capital assets over £2,000.
The flat rate VAT percentage you pay is dependent on the sector your business operates in and the cost of goods used. You have to apply to HMRC and meet certain requirements to be eligible for the scheme. Your VAT taxable turnover must be less than £150k, your business can’t be closely associated with another business and you can’t have been found guilty of a VAT offence, or paid a penalty for VAT evasion, within the last year.
Take Advantage of Research & Development Tax Credit
Research & Development work includes developing new products, processes or services. This is especially relevant for new businesses that are just starting out and investing in developing a new offering.
R&D Tax Credits are a Government incentive scheme designed to encourage innovation and growth for UK businesses by allowing a percentage of investment in innovation to be claimed back.
The scheme allows up to 33.35% of R&D spend to be recovered as a cash repayment or through corporation tax.
Eligibility is not limited by industry but making a claim can be complex.
Signing up to Gorilla Accounting
If you’ve not already set up as a limited company, we are company formation experts. We can set up your limited company for just £50 + VAT so you can leverage the tax savings that incorporation presents.
Our accountants are on hand should you have any queries, so call 0330 107 9678 or request a call back for expert tax advice.
If you are already a limited company and you’re looking to appoint an accountant, or switch from an accountant you’re already using, joining is so easy. We will do all the paperwork needed to switch, including speaking to your old accountant and getting what we need from them for you. All you need to do is fill in our form here. Call us for a chat today!
