In approaching the end of your company’s financial year, below are some things to consider to help minimise your tax exposure.
Corporation Tax
From 1 April 2023:
- The main rate of Corporation Tax will increase from 19% to 25%.
- The small profits rate (19%) will apply to single companies with profits of less than £50,000.
- Marginal relief will be given for companies with profits between £50,000 (lower limit) and £250,000 (upper limit).
- The upper and lower limits of the new chargeable profits bands will be apportioned according to the number of companies which are Associated for Corporation Tax.
- The thresholds for marginal relief will also be apportioned for short accounting periods.
- The set fraction used by HMRC to provide a gradual increase in rate is 3/200
Pensions
Contributions into a pension are tax deductible and will reduce your corporation liability. These cannot be retrospective and there is a limit of £60,000 per individual per tax year. Directors (and family run businesses) are able to make contributions into private pensions such as SIPP or SASS. If you are interested in any of these schemes, please consult your financial adviser or book a discovery call with us.
Charitable Donations
If you regularly give to charity, these can be done from the company and will reduce your corporation tax liability. Donations must be to a UK registered charity and may not exceed your profit after tax figure.
Capital Expenditure
Expenditure on new equipment, plant and machinery usually benefit from 100% tax exemptions (capital allowances). It may be a good time to invest in new technology, equipment or tax efficient company vehicle.
Stock
If you deal in goods, you should have a record of stock as well as the value of stock as at the end of your financial year. Whilst the value of your cost on the profit and loss statement may be reduced (due to high stock values), the value of lost, stolen, damaged or obsolete stock can be accounted for as tax-deductible expenditure. You should therefore keep records for this.
Unpaid Supplier Invoices and Committed Expenditure
Accounting for and recording unpaid supplier invoices is a great way to reduce your tax liability. Your bookkeeping (or bookkeeper) should have logged this to your bookkeeping software (if you have one). Where you have committed to a significant expenditure and signed a contract, the value of the expenditure can also be accounted in the form of accruals.
Deferred Income
Where your customers pay in advance of the work, service or goods, a proportion of this can usually be excluded from tax computations. As an example, if you received a payment in September for work that is to be done in November, the amount received can be excluded from your sales / turnover figures for the year – this will certainly reduce your tax liability.
Investment funds
Where funds have been transferred into the business for onward investment, this does not count as trading income and should be excluded from corporation tax computation.
Bad Debts
Where you have debtor amounts (monies owed to the business) for a significant period of time (probably a year or more), and you are certain these will not be recoverable, the value can usually be written off as tax deductible.
Dividends
With an estimated or forecasted for profit after tax, you should take steps to record and document final dividends for the financial year. Dividends can be paid at any time – it is however important to have a record of this as prescribed by law. Please see our guide on how to pay and process dividends https://bit.ly/tac-paydividends
Director’s Loan Account
Overdrawn director’s loan accounts would usually attract additional corporation tax at the rate of 33.75%.
This can be avoided by reducing the balance on this account to just under £10,000. This can be achieved by declaring additional dividends, company bonus via payroll or simply returning borrowed funds to the business. Director loan account balances are usually made up of funds not taken out as dividends, salaries or expenses.
Tax efficient remuneration
Consider extracting funds and paying yourself in the most tax-efficient way. You could optimise a few strategies as follows:
- Splitting income with a spouse or family members
- Having different classes of shares would enable different levels of dividends to be paid
- Maximise the dividends threshold – up to £1,000 is tax free and between £32,000 to £33,500 (approximately) is taxed at 8.75%. Higher dividends will be taxed at 33.75% and there is an additional top rate of 39.35%. The rate at which you will be taxed on dividends is subject to any other taxable income you may have received.
- Review the director loan accounts and consider s455 tax on outstanding balances.
Company car
Companies cars are subject to the car benefit and car fuel benefit charge. In order to reduce or avoid any addition income tax liability, consideration can be given to making capital contributions towards the value of the car as well as paying back the cost of fuel that is used privately (where fuel is provided by the employer).
If you would like to discuss issues arising from this article or to find out more on the applicable tax strategies, please contact Tobi Lab via email at hello@thetacuk.com.