If your company’s tax year ends on 31 March, you’re not alone – plenty of UK businesses use the same date. Like them, you now have less than two months to take advantage of this year’s business tax allowances; and if you have longer, it’s still a job that needs doing.
For business owners, finding the best blend of salary, bonus and dividends could make all the difference to what profits you end up receiving. Yet this is not necessarily a simple process, as you must consider both personal tax allowances and business tax allowances in order to find the most tax-efficient solution.
A good place to start is the annual tax-free dividend allowance, which is set at £2,000. Above that threshold, dividend payments are taxed at 7.5% for basic rate taxpayers; 32.5% for higher rate taxpayers; and 38.1% for additional rate taxpayers. Maximising this allowance by 5 April may therefore make good sense; beyond that limit, how much you choose to pay yourself and your staff in dividends will depend on weighing the relative tax take.
As always, pensions should form an important part of your financial planning. While your primary focus will be ensuring that you have sufficient funds for your retirement, pension contributions also benefit from significant tax advantages, making them an important part of tax year-end planning.
Company pension payments are deductible as a company expense and can therefore reduce or wipe out liability to Corporation Tax. Additionally, under pension freedoms rules, those over the age of 55 can take the whole of their defined contribution pension fund back and use the cash as they wish; that includes up to 25% of the total fund tax-free, with the remainder subject to Income Tax at your highest marginal rate. Contributions need to be paid before the company’s financial year-end in order for the business to qualify for the deduction during that accounting period.
Furthermore, you may be able to add up to £40,000 to your pension this tax year using pre-tax profits from your business. In fact, you can still use up unused claims for the previous three years as well, using the ‘carry forward’ rule – potentially adding up to £160,000 to your pot, all told.
If your need for immediate income is well-covered, it is also worth factoring in the estate planning advantages offered by pension contributions. Regardless of whether a defined contribution pension is already being drawn or not, it can pass tax-free to any beneficiary if the holder dies before the age of 75. Even if he or she dies later than that, beneficiaries only pay Income Tax at their marginal rate (and even then, only when the money is withdrawn) – they do not pay Inheritance Tax.
A separate factor to consider is that the minimum total contribution to workplace pensions under automatic enrolment rules will rise, on April 6, from 5% to 8%. (Note that the 8% is composed of a 5% employee contribution and a 3% employer contribution.) Inevitably, this could affect employees’ personal tax calculations – and decisions.
It’s also a good moment to consider your company expenditure. The more your company spends on business-related purchases, the lower its profits – and thus, the lower its tax bill. Your purchases do need to be “wholly, exclusively and necessarily” for the purpose of business but, if those criteria are fulfilled, there is are number of options to consider.
There are several standard forms of expense that it is worth reviewing: expenses paid with personal money; office supplies; use of your home as an office; staff events (up to £150, including VAT); subscriptions and annual fees; and asset purchases (e.g. computers). But HMRC provides a much more complete list for the self-employed online.
Finally, it might be a good time to review your salaries and bonuses. You might have a partner or spouse who could be remunerated for any legitimate work they have done over the course of the year. Paying their salary will, of course, reduce your Corporation Tax liability. But whoever you need to start paying a salary to during the current tax year, you may want to consider putting them on the company payroll before 31 March, or whenever your company’s financial year comes to its end.
Navigating the end of the tax year could make a significant difference to the cash in hand you ultimately enjoy both as a company and as an individual. Finding an adviser who knows you and your business can help you to ensure the best tax outcome.
If this article was of interest to you or you would like some advice on your business’s financial Planning, please contact Ryan Guthrie at Ubuntu Wealth Management on 07749465907 or email Ryan.Guthrie@sjpp.co.uk.
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The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.