8 tax breaks small businesses can take

8 tax breaks small businesses can take

As a small business owner there are a number of taxes you’re required to pay, depending on what you do and how your business performs.

If a tax applies to you, there’s no getting away from it. You need to pay the bill in full and on time—unless you have a valid reason to defer your tax payments.

But there are ways to ease the burden of tax to free up cash for your business by having the amount you’re required to pay reduced with a tax break.    

In this post, we’ve compiled a list of the different types of tax breaks available to small businesses, with details on eligibility and how to claim for a deduction.

Table of contents

What is a tax break?

A tax break, or tax relief, is a way for you to reduce your tax liability by taking into account things you spend money on or invest in for your business.

It’s the Government’s way of helping to stimulate the economy by ensuring you have more money to spend on your business. It’s also a way to encourage positive behaviours, such as donating to charity and investing in innovation. 

Taking advantage of tax breaks doesn’t mean avoiding tax, taking advantage of a loophole in the tax system, or paying less than you owe. You’ll still be contributing fully to the UK economy and paying the correct amount of tax. All it means is that you’re supported by certain schemes to boost your personal take-home pay and/or company balance sheet.

Some tax breaks are industry-specific. Others depend on your business structure and whether you’re a sole trader or limited company. Each tax break also comes with its own set of criteria that determine whether you’re eligible.

We’ll cover eligibility as we break down each of the schemes available to small business owners. However, it’s always worth seeking professional help from a chartered accountant before pursuing any kind of tax break. 

Top Tip: If you don’t have an accountant for your business, it may be worth consulting with one when it comes to calculating your business tax. To learn more about how accountants can help to ease the complexities of filing your tax return, read our complete guide to small business accounting. If you do decide to move forward, it can be difficult to know where to start your search. To help, we’ve written an article on how to choose an accountant for your small business and a guide to how to find an online accountant for your small business. 

Here are eight tax breaks available to small and medium-sized enterprises (SMEs).

1. Small business rate relief

Most businesses with their own premises get charged a ‘business rate’ by their local council for their non-domestic, or business, property. The Small Business Rate Relief scheme (SBRR) was introduced by the Government in 2005 as a way to help ease the financial burden on small businesses with their own premises. 

You’re entitled to SBRR if you have:

  • One property with a rateable value of less than £15,000; or
  • One main property and other additional properties, providing they have rateable values of less than £2,900 and the total rateable value of all properties is under £20,000.

If your property has a rateable value above those thresholds but below £51,000 you may still be entitled to rate relief. However, your bill will be calculated using the small business multiplier. This is currently 49.1p, lower than the 50.4p standard multiplier used to work out relief for properties under £15,000. So tax relief won’t be as generous.   

How much tax relief you’re entitled to depends on the rateable value of your property. Relief is tapered from 100% to 0% on rateable values between £12,001 and £15,000.

You won’t be entitled to SBRR if your business receives Mandatory Rural Rate Relief or Mandatory Charitable Relief. These are separate schemes available for businesses in rural areas with a population under 3,000, and businesses who use their property for charitable purposes respectively. 

Applying for Small Business Rates Relief

To check if you’re eligible and apply for SBRR, you’ll need to contact your local council and complete a rate relief application form. 

Your council also automatically applies exempted and empty buildings relief for certain properties, such as agricultural lands and buildings, places of worship and buildings used for the training or welfare of disabled people. You’ll also receive transitional relief if your rates change at revaluation. 

While the premise is the same, business rates are handled slightly differently in England, Scotland, Wales and Northern Ireland so be sure to check the website of your specific government.

Additional business rates relief

As well as small business rates relief, the Government offers several other schemes including:

  • Enterprise zone relief for businesses starting or relocating to a local enterprise zone
  • Hardship relief for businesses in financial difficulty  
  • Retail discount for shops, restaurants, cafes, bars, pubs, cinemas, music venues and hospitality or leisure businesses 
  • Local newspaper relief for property used as office premises by journalists and reporters on a local newspaper

If your business falls into any of these categories, contact your local council to find out if you’re eligible for tax relief.

Business rates relief and Covid-19

To help businesses impacted by the coronavirus pandemic, the Government has paused business rates for certain sectors.

If your business operates in the retail, hospitality or leisure sectors in England, you won’t pay business rates for the 2020-2021 tax year. This change should have been applied automatically on your April 2020 council tax bill.

The details of Covid-19 related rates relief schemes are different for Scotland, Wales and Northern Ireland.

Find additional information on the Small Business Rate Relief Scheme at the GOV.UK website. 

2. Charity donations

Donations to charities from individuals in the UK are tax-free. If a charity or Community Amateur Sports Club (CASC) is registered for Gift Aid, they are able to claim the basic rate of tax that donors have paid from HMRC. 

This means a charity or sports club will get an extra 25p for every £1 you donate and it won’t cost you extra. 

It’s a scheme that works well — £1.35 billion in GiftAid was claimed by charities in 2018-19. 

Claiming tax relief for charity donations  

If you’re registered for Self Assessment and pay income tax above the 20% basic rate, you can claim the difference between the tax you’ve paid on any donations made through Gift Aid and what the charity got back when you complete your Self Assessment tax return.

Top Tip: If you’re self-employed or have income streams in addition to your wages from employment, you may need to complete a Self Assessment tax return. To figure out if Self Assessment applies to you and how to register, complete and pay your Self Assessment tax bill, read our complete guide to everything you need to know about Self Assessment tax returns

If you claim Marriage Allowance, your tax-free allowance may increase to account for donations made through Gift Aid. This will be done automatically when you complete your annual Self Assessment tax return.

If you’ve made a donation as a company, deductions are deductible from your total profits, as explained by Charity Tax Group:

“Companies are entitled to tax relief for qualifying charitable donations made to charities. The donations are paid gross without the deduction of income tax. The donations are deductible from the company’s total profits in the year in which the donations are made. The amount of the deduction is limited to the amount that reduces the company’s total taxable profits to nil: the payment of a charitable donation cannot create or augment a company’s loss for tax purposes. This means that charities do not reclaim tax from HMRC in respect of company donations.”

Find additional information on charity donations tax relief at the GOV.UK website.

3. Allowable business expenses

Regardless of size or sector, every small business incurs running costs, or money spent to keep your business ticking over and competitive.

Allowable business expenses are designed to help you manage some of these running costs by deducting the expense from your taxable income or profits.

To use GOV.UK’s example:

‘Your turnover is £40,000, and you claim £10,000 in allowable expenses. You only pay tax on the remaining £30,000 – known as your taxable profit.’

Allowable expenses include:

  • Office costs (including business premises costs). Items you’d typically use for less than two years, such as stationery, software and printer ink, as well as rent, rates, power and insurance costs. 
  • Travel costs. Business car or van and travel expenses, including fuel, hire charges, breakdown cover, insurance, transport fares and hotel stays. 
  • Clothing. Uniforms and protective clothing needed for work.
  • Staff. Employee salaries, bonuses, pensions, benefits, training courses, subcontractor pay and agency fees.
  • Financial costs. Professional indemnity insurance premiums and hiring of accountants, solicitors, surveyors and architects.
  • Things you buy to sell on. Raw materials, stock and costs associated with production.
  • Advertising and marketing. Website costs, direct mail advertising, newspaper or directory advertising and free samples.
  • Training courses. Training such as a qualification or refresher course that helps you improve your skills and knowledge for the benefit of your business. 

Claiming tax relief for Allowable expenses

If you’re self-employed, allowable expenses can be listed on your Self Assessment tax return. The amount claimed will automatically be deducted from your taxable income, but you need to keep an accurate record of purchases for up to six years. You can do this by using Tide’s expenses management tools or through our free online expense spreadsheet template.

Screenshot of the Tide expense sheet template

Top Tip: Keeping track of expenses matters when it comes to paying tax, but it also helps you to save money, cut down on unnecessary costs and improve your business’s financial health in the long run. To learn more about how to efficiently manage and track your business expenses, read our guide on how to keep track of expenses.

If you’re a subcontractor and have already paid tax during the year, allowable expenses will be repaid in the form of a tax refund.

There are some exemptions to keep in mind, though: 

  • If you use your £1,000 tax-free trading allowance for property or trading income, you won’t be able to claim allowable expenses.
  • Allowable expenses don’t include money taken from your business to pay for a private purchase (you have to have personally paid for it).
  • If you use something for both work and personal use you can only claim allowable expenses for the business costs. To use another GOV.UK example: ‘Your mobile phone bills for the year total £200. Of this, you spend £130 on personal calls and £70 on business. You can claim for £70 of business expenses.’.

If you run your own limited company, expenses can be deducted from profits before tax. This is fairly straightforward to do and involves reporting any business item you use personally as a company benefit.

Find additional information on allowable business expenses at the GOV.UK website.

4. Annual Investment Allowance (AIA)

Where allowable expenses allow you to get a tax break on the costs incurred by everyday running costs, Annual Investment Allowance (AIA) gives you tax relief on large purchases of things you buy to keep and use in your business. 

Items that qualify for AIA include most ‘plant and machinery’ up to a certain amount. Until 31 December 2020, this amount is £1 million but this changes, often significantly, year-on-year, so you should research allowances when planning for any major purchase.

According to GOV.UK, plant and machinery includes:

  • Items that you keep to use in your business, including cars
  • Costs of demolishing plant and machinery
  • Parts of a building considered integral, known as ‘integral features’
  • Some fixtures, for example fitted kitchens or bathroom suites
  • Alterations to a building to install other plant and machinery (this does not include repairs)

You cannot claim capital allowances on things you lease, buildings, land and structures or items used only for entertainment (e.g. a yacht or karaoke machine). Cars, items you owned for another reason before starting your business and items given to your business are also exempt from AIA.

Claiming Annual Investment Allowance

You can claim AIA on your Company Tax Return in the accounting period that you bought the item, which HMRC states as:

  • The date you signed the contract if payment is due within four months
  • The date payment is due if due more than four months later 

If you sell an item after claiming AIA, you may need to pay additional tax in the accounting period of sale.

Find additional information on AIA at the GOV.UK website.

5. Employment Allowance

If you run a company and employ staff, you may be able to reduce your National Insurance (NI) bill by up to £4,000 by taking advantage of Employment Allowance.

It works by reducing your Class 1 National Insurance Contributions (NICs) each time you run your payroll until the £4,000 has gone or the tax year ends, whichever comes first. 

Class 1 National Insurance thresholds 2020 to 2021
Lower earnings limit £120 per week
£520 per month
£6,240 per year
Primary threshold £183 per week
£792 per month
£9,500 per year
Secondary threshold £169 per week
£732 per month
£8,788 per year
Upper secondary threshold (under 21) £962 per week
£4,167 per month
£50,000 per year
Apprentice upper secondary threshold (apprentice under 25) £962 per week
£4,167 per month
£50,000 per year
Upper earnings limit £962 per week
£4,167 per month
£50,000 per year
Source: GOV.UK

For example, if you have an employee who is paid £20,000 a year and pay the typical Employer NI rate of 13.8% on earnings over the £8,788 NI secondary threshold, they’ll incur NICs of £1,556.36 a year. 

Because the full amount of Employer NICs (£1,556.36) is within the £4,000 Employment Allowance, you won’t pay any Employer NICs. 

Where NICs exceed the Employment Allowance limit, the first £4,000 is written off. 

Claiming Employment Allowance

You can claim Employment Allowance if you’re a business or a charity with employee Class 1 NI liabilities of less than £100,000 in the previous tax year. 

You can also secure the tax break if you employ a care or support worker.

If you’re eligible, Employment Allowance will be deducted from Class 1 NICs by payroll software automatically or by ticking ‘Yes’ in the Employment Allowance field. 

Find additional information on Employment Allowance at the GOV.UK website.

6. Research and development (R&D) tax relief

In 2018, UK businesses spent £37.1 billion on research and development, the equivalent of 1.7 of GDP. By 2027, the Government wants that figure to reach 2.4% of GDP

To help promote R&D investment in small businesses, the Government offers Corporation Tax relief so that companies can deduct an extra 130% of their qualifying costs from their yearly profit, as well as the standard deduction of 100%, for a total 230% tax deduction.

This means, if you spent £1,000 on R&D, you can reduce your yearly taxable profits by an additional £1,300 on top of the £1,000 outlay. 

In addition to tax relief, if you invest in R&D and your company makes a loss, you can choose to claim an R&D tax credit worth up to 14.5%. In this instance, the Government pays you a cash sum.

Claiming Research and Development tax relief

To be eligible for R&D tax reliefs, your business must have fewer than 500 staff and a turnover of €100m or a balance sheet total under €86m. If your company has external investors because you raised venture capital, you’ll need to show figures detailing the voting rights of connected or partner companies. 

If you meet the criteria, you’ll be able to claim for reduced tax payments on your project from the day it starts through to the point that you develop or discover the advance, or the project ends. Relief can be claimed up to two years after the end of the relevant accounting period. 

Costs you can claim for include:

  • Employee costs. Salaries, wages, Class 1 NICs and pension contributions for staff directly working on your project.
  • Subcontractor costs. 65% of relevant costs for subcontractors used in your project.
  • Software. Software licence fees and a ‘reasonable share’ of software partly used in your project.
  • Consumables. A relevant proportion of materials and utilities used in your project.

You won’t be able to claim for:

  • The production and distributions of goods or services
  • Capital expenditure
  • Cost of land
  • Cost of patents and trademarks
  • Rent and rates

You can submit a claim for R&D tax reliefs by completing the enhanced expenditure section of your full Company Tax Return form. GOV.UK also has an online service with details and help on how to support your claim, including which details you need to include about your project.

Find additional information on R&D tax reliefs at the GOV.UK website

7. The Patent Box Scheme

Like R&D tax relief, the Patent Box scheme encourages innovation and rewards forward-thinking companies with a Corporation Tax break.

The scheme is aimed at businesses that retain and commercialise existing UK and European patents or develop new patented products. If your business meets the criteria, you’ll be able to enjoy a reduced Corporation Tax rate of 10% on all profits earned from patented inventions since 1 April 2013. 

And the reduction is generous. In 2016-17, 1,170 companies claimed a total tax relief of £1,035 million under the Patent Box scheme. 

To benefit from this tax break, your business must:

  • Be liable to Corporation Tax
  • Make a profit from exploiting patented inventions (these don’t have to be your own inventions)
  • Own or have exclusively licenced-in the patents (you may also be eligible for the scheme if your company holds certain medicinal or botanic innovation rights)
  • Have undertaken qualifying development on the patents

As well as the business eligibility criteria, your patent-related income needs to tick the necessary boxes. To qualify for the tax break, your income needs to come from:

  • Selling patented items including products, products that incorporate the patented items and bespoke spare parts
  • Licensing out patented rights
  • Selling patented rights
  • Compensation income or damages from the infringement of rights that you own

Income earned from regular activities and marketing asset returns (e.g. income from branding, rather than innovation) does not qualify. 

Top Tip: Patents fall under the intellectual property umbrella, along with Trade Marks, Designs, Copyright and Trade Secrets. To learn more about how to protect all of your intellectual property, read our guide on how to protect a business idea.

Claiming Patent Box tax relief

To get the Corporation Tax cut, you’ll need to make an election into the Patent Box within two years after the end of the relevant accounting period. You can do this in the computations that accompany your Company Tax Return or separately in writing.

The process of calculating your qualifying profits and income, however, can be complex. 

New rules introduced in 2016 to protect the system from abuse mean that IP rights, patented products and product families need to be ‘streamed’ separately. For example, if you have five patented products, you’ll need to carry out your income and profit calculations five times.   

You can find an example of Patent Box calculation on the HMRC website.

Given the complexities, it’s worth seeking specialist tax advice before making a claim for tax relief.

Find additional information on the Patent Box scheme at the GOV.UK website.

8. Creative Industries tax reliefs (CITRs)

Creative Industries Tax Reliefs were launched by the Government in 2013 as a way to encourage long term investments in the UK’s creative industries. 

They’ve proven popular. In 2019-20 period, a total of £1.11 billion was paid out in tax reliefs across all creative industries:

  • Film
  • High-end TV
  • Animation
  • Video games
  • Children’s TV
  • Theatre
  • Orchestra
  • Museums and Galleries Exhibition

A screenshot of the amount of creative industries tax reliefs paid graph
Source: HMRC

CITRs work in a similar way to R&D tax breaks in that they allow a deduction of research and development spending against trading profits. 

Which means, if you qualify, you can claim an additional Corporation Tax reduction (the enhancement) of up to 100% of enhanceable expenditure. Or, if you make a loss, 25% of the loss up to the amount of enhanceable expenditure.

Enhanceable expenditure is the lesser of qualifying UK expenditure or 80% of the total qualifying expenditure. 

Eligibility for CITR differs depending on your industry. Here’s an overview of who and what qualifies:

Film Tax Relief (FTR)

You can claim Film Tax Relief if your film:

  • Passes the cultural test (it must be certified as British) or qualifies as an official co-production
  • Is intended for theatrical release
  • Has at least 10% of its core costs relate to activities in the UK

High-end Television Tax Relief (HTR)

You’ll be eligible to claim High-end Television Tax Relief if your TV programme:

  • Is certified as British by the British Film Institute (BFI)
  • Is intended for broadcast to the general public
  • Is a drama, comedy or documentary
  • Has at least 10% of its core costs relate to activities in the UK
  • Has an average core expenditure (money spent on pre- and post-production and photography) of at least £1 million per hour of slot length
  • Has a slot length of greater than 30 minutes

Animation Tax Relief (ATR)

Animation Tax Relief can be claimed if your programme:

  • Is certified as British by the British Film Institute (BFI)
  • Is intended for broadcast to the general public
  • Has at least 51% of its core expenditure on animation
  • Has at least 10% of its core costs relate to activities in the UK

Your company must also be responsible for production, planning and decision making. As well as contract, rights, goods and services negotiations.

Video Games Tax Relief (VGTR)

You can claim if Video Games Tax Relief your game:

  • Is certified as British by the British Film Institute (BFI)
  • Is intended for the general public
  • Has at least 25% of its core expenditure on goods and services provided from with the European Economic Area (EEA)

As with Animation Tax Relief, your company must be engaged in planning and decision making and directly negotiate terms for contracts, rights, goods and services.

Children’s TV Tax Relief (CTTR)

Children’s TV Tax Relief is similar to high-end TV and animation and the eligibility criteria are the same, except for:

  • The intended audience must be under the age of 15
  • If your programme is a quiz, game show or a content show, the prize total must not exceed £1,000

Theatre Tax Relief (TTR)

Theatre Tax Relief can be claimed if your theatre:

  • Puts on a live play, opera, musical drama or ballet production
  • All of most of the productions are for the general public or put on for education purposes
  • Spends at least 25% of its core expenditure costs on goods or services provided from with the European Economic Area (EEA)

Orchestra Tax Relief (OTR)

To claim Orchestra Tax Relief you must put on a qualifying orchestral concert that:

  • Is performed by an orchestra, ensemble group or band that consists of at least 12 instrumentalists
  • Features instruments that are not electronically amplified
  • Is performed live for the paying public or put on for educational purposes
  • Spends at least 25% of its core expenditure costs on goods or services provided from with the European Economic Area (EEA)

Your company must also be responsible for planning and putting on the concert.

Museums and Galleries Exhibitions Tax Relief (MGETR)

Museums and Galleries Exhibitions Tax Relief is available for primary and secondary production charities and local authorities, but eligibility differs depending on whether you’re primary or secondary. 

According to GOV.UK, a primary company must:

  • Make an effective creative, technical or artistic contribution
  • Be actively engaged in planning and decision-making
  • Directly negotiate, contract and pay for rights, goods and services
  • Be responsible for producing and running the exhibition at a venue

A secondary company must be responsible for putting on the exhibition at their venue and actively engaged in the decision-making process for the venue. 

For the exhibition to qualify for the tax break, it must:

  • Be a curated public display of scientific, historic, artistic or cultural interest (this includes single objects)
  • Have spent at least 25% of its core expenditure on goods and services from within the European Economic Area (EEA)

If you’re putting on a touring exhibition, you’ll need to show that your exhibition is held at more than one venue, with at least 25% of works displayed at every venue and no more than six months between exhibitions.

Claiming Creative Industries tax reliefs

The process of claiming CITR is broadly the same for each industry and can be done by calculating the amount of additional deduction and payable credit you’re owed on your Company Tax Return.

Find additional information on allowable business expenses at the GOV.UK website.

Wrapping up

Whether you’re self-employed and work from home or run a limited company with multiple staff, there’s a tax break that exists to help your business. Taking advantage of them can help free up cash that can be invested in growth opportunities. 

Use this post and the links provided to find out what’s available and work with a certified accountant to help you claim what you are eligible for.

Photo by Anthony Shkraba, published on Pexels

Shahree Zin

Partnerships Executive and small business accounting advocate

Tide Team

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