For many businesses, the end of the tax year is also the end of the business’s financial year so this can be a good time to review your tax planning. For individuals, maximise your ISA allowances for the 2023/24 tax year and you might also want to consider increasing your pension savings before 5th April 2024.
Tax planning tips for businesses
Assessing profit extraction methods
Particularly for limited companies, profit extraction methods can be a key part of tax planning. Whether it involves salaries, bonuses, dividends, or a combination of these, choosing the right strategy can significantly impact tax liabilities.
Optimising the method and timing of when you extract profits can mitigate tax while ensuring that owners and key staff are compensated fairly.
Dividends
Dividends are a fundamental part of the way any company distributes profit. For an owner managed company, though, dividends frequently play a key role in the owner’s remuneration strategy.
Particularly as the tax year concludes, it is important to check the timing of your dividend payments. For instance, have you earned more this year than you expected? Might another dividend payment push you into higher rate tax? If so, deferring a dividend may help you.
By aligning dividend payments with tax thresholds and allowances, you may be able to reduce your tax exposure.
Capital allowances
Capital allowances are a tax relief available on many types of capital expenditure. Bringing forward or delaying the purchase of capital items, for example IT equipment or a refurb project, can help you to maximise the allowances available.
For companies whose profit level means they pay at the marginal relief rate, optimising capital allowance claims can also help to reduce the tax rate that a company would otherwise pay.
Naturally, it is always important to avoid letting the tax ‘tail wag the dog,’ but using capital allowances effectively can not only reduce tax liabilities but also help to fund vital investment in business assets.
Capital expenditure
Unless the business year end is 31st March or 5th April, the end of the tax year is not a significant date as far as capital allowances are concerned. In order for new equipment to attract capital allowances, the expenditure must be incurred on or before the end of the accounting period. Limited companies buying new (not second hand) equipment are entitled to fully expense the cost of most acquisitions against business profits. There is no financial limit on expenditure qualifying for this “full expensing” relief.
Unincorporated businesses are entitled to 100% write off for the first £1 million spent on new and used equipment in a 12 month period. This “annual investment allowance” (AIA) is also available to limited companies buying second hand equipment. The AIA does not apply to motor cars but there is a special 100% tax relief if you buy a new zero-emissions motor car.
Where equipment is bought under a hire purchase contract, the capital allowances outlined above are available on the full cost of the asset provided it has been brought into use by the end of the accounting period. This is despite the fact that the payments may be spread over a number of months.
Research and Development Tax Credits
If your limited company is involved in innovating, research and development (R&D) tax credits can be very worthwhile. However, claiming R&D tax credits requires thorough documentation and there are specific criteria that need to be adhered to.
As the business approaches its year end, it is a good time to check that records of R&D activity are up-to-date and complete.
R&D tax credits can reduce tax liabilities as well as provide funding for future innovative activities that keep your business on the front foot.
In conclusion, tax planning as the tax year-end approaches is an important part of leveraging the tax incentives available to you, minimising tax liabilities while staying compliant with tax laws.
Tax planning tips for individuals
Pension planning
Under the current rules, the government adds to your pension contributions at the 20% basic rate. For instance, if you save £4,000 in a personal pension, the government tops this up to £5,000. If you are a higher rate taxpayer there is a further £1,000 tax relief when your tax liability is calculated, reducing the net cost to £3,000.
Additional pension contributions can be even more effective if your income is between £100,000 and £125,140 as the gross pension contribution reduces net income for the purposes of the reduction in the personal allowance. Note that for every £2 of income in excess of £100,000, the £12,570 personal allowance is reduced by £1, with reduction to nil where net income is £125,140 or more. This is effectively a 60% tax saving.
Capital Gains Tax
You might wish to consider bringing forward capital gains to before 6th April 2024 where you haven’t used your £6,000 CGT annual exemption. This exempt amount reduces to just £3,000 for gains made in 2024/25.
ISA and LISA
If you have some spare cash, an obvious tax planning point would be to maximise your ISA allowances for the 2023/24 tax year (currently £20,000 each).
Use a lifetime isa (lisa) to save for your first home - Those aged between 18 and 40 can set up a Lifetime ISA (Individual Savings Account) to buy their first home or save for later life. You can put in up to £4,000 each year until you’re 50. The government will add a 25% bonus to your savings, up to a maximum of £1,000 per year. Note that the Lifetime ISA limit of £4,000 counts towards your £20,000 annual ISA limit.
You can withdraw money from your ISA if you’re:
- buying your first home,
- aged 60 or over, or
- terminally ill, with less than 12 months to live.
However, you’ll pay a withdrawal charge of 25% if you withdraw cash or assets for any other reason (an unauthorised withdrawal). This recovers the government bonus you received on your original savings.
Marriage Allowance update
Married Couple’s Allowance could reduce your tax bill each year if you’re married or in a civil partnership. For the 2023 to 2024 tax year, it could cut your tax bill by between £401 and £1,037.50 a year.
Don’t be late in paying your tax bill!
2022/23 income tax, CGT, class 2 and 4 NIC liabilities should have been paid by 31st January 2024 unless you have agreed a payment plan with HMRC. Note that if the balance is still unpaid at the end of February 2024, a 5% surcharge penalty is added in addition to the normal interest charge unless a payment plan has been agreed.
LWA are here to help you
If you would like assistance in proactively managing your tax liabilities, we have a range of tools and calculators as well as expert knowledge of the tax laws. Please feel free to call our Corporate and Personal Tax team who will be pleased to help you. Contact us by email to mail@lwaltd.com or give us a call on 0161 905 1801 in our South Manchester office or 01925 830 830 in Warrington. To receive monthly tax tips, sign up to our newsletter or follow us on social media from our website here.