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The importance of tax planning

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Last editedFeb 20223 min read

From inheritance tax planning to capital gains, it’s always wise to plan ahead when it comes to dealing with significant sums of money. The same holds true for business-centric issues like VAT and corporate tax planning. Keep reading to find out all the reasons why tax planning is so important in the UK, and how to craft your very own HMRC tax payment plan.

What does tax planning mean?

Tax planning refers to the process of minimising tax liabilities. In other words, you want to reduce what you owe on your tax bills by taking advantage of any allowances, exclusions, exemptions, and deductions. For business owners, this means looking both at company taxes as well as personal taxation.

Why is business tax planning important?

The primary perks of business tax planning are baked right into the definition above. You’ll minimise what you owe to HMRC by taking advantage of all available credits. Over the long term, this helps your business achieve its financial goals more easily. Here’s a quick rundown of some of the benefits that a good tax payment plan holds:

Greater control over payments
Reduction in tax rates
Reduction in tax bills
Full advantage of tax credits
Use of tax relief legislation
Control over payment timings

It’s important to remember that tax regulation is constantly changing, so you should review your strategy frequently to ensure you’re using all available allowances.

Choosing a business structure

One of the first issues to address in terms of tax planning is your business structure. This will have a significant impact both on the credits you’re eligible for, as well as your tax liabilities. For example, if you set up a business as a sole trader or partnership, you are considered self-employed for tax purposes and will need to file an HMRC Self Assessment return. Limited companies will have different taxation requirements, with additional paperwork to file.

It’s best to consult with a corporate tax accountant before setting up your new business to be sure you’re considering all benefits and drawbacks of each structure.

Tax planning UK considerations

No matter the structure, there are a few key types of taxes that you should be aware of. Here’s a rundown of the most common tax planning UK issues:

Corporate tax

Corporate tax planning includes thinking about whether you should defer income or profit to minimise your tax bill. Strategies can also consider bringing costs forward to a different accounting period and taking advantage of capital allowances.

Capital gains tax

It’s normal to buy and sell assets throughout the tax year as a business, in which case you’ll need to plan for capital gains tax. This is particularly important for any businesses dealing with real estate. By planning ahead, you’ll not only know which assets are exempt, but you can avoid a surprise bill at the end of the tax year.

Dividend and year-end planning

Limited companies that expect to make a significant profit this year should think about withdrawing a larger dividend. This potentially helps minimise your taxable income. With the help of a business tax consultant, you can determine whether a dividend strategy makes sense.

Inheritance tax

Inheritance tax planning is more of a personal tax issue, but it’s worthwhile for business owners to include this in their strategy to reduce liability. Without planning, inheritance tax can cut into your estate after you pass away. Typical strategies include gifting property, taking out a new mortgage, restructuring a pension fund, and downsizing your estate.

International tax

With more businesses than ever dealing with international transactions, international tax planning strategies often come into play. You’ll need to learn about avoiding double taxation, taking advantage of foreign tax credits, and timing your tax bills in the most advantageous way.

VAT

Any business with a turnover greater than £85,000 must pay VAT, so you should stay on top of all the latest regulations regarding this value tax.

How to create an HMRC tax payment plan

What are your options if you’re finding it difficult to pay your tax bills? Corporate tax relief might be available. If you file a Self Assessment return and owe under £30,000, you can arrange to pay your tax bill with monthly instalments.

For other types of taxes, you might be able to set up an HMRC tax payment plan under the Time to Pay Arrangement service. If you’ve received a bill or letter, you should call the issuing HMRC office. If not, you can phone the Payment Support Service (PSS) on 0300 200 3835.

Of course, the purpose of tax planning is to avoid being put in the situation where you need to work out a payment plan. By maximising credits and taking the time to anticipate your future bills, you’ll be better placed to take control over your taxes.

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