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Tag: tax planning

tax planning

  • 2023 Tax Year End Planning

    Pensions

    With corporation tax increasing from 19% to 25%/26.5% many company owners may wish to delay some pension contributions to after April 2023, subject to using the £40k annual allowance effectively.

    High earners should always check they’re keeping taxable earnings under £100k wherever possible which might be achieved by paying more into your pension scheme before the end of the relevant tax year.

    If you’re likely to become an additional 45% taxpayer from April 2023 for the first time because your income is between £125k and £150k, you’ll save an extra 25% instead of 20% by making pension contributions after April 2023.

    Spouse Dividends

    Since 6 April 2022, dividend tax has been at its highest level. If you can take more dividends from your company you might consider asking your spouse to take on some shareholder responsibilities and  receive some dividends, particularly before 5 April 2023 while the £2k 0% tax band remains available.

    From 6 April 2023, the £2k is halved to £1k so this advantage reduces, however, spreading the tax costs across lower tax bands is likely to remain advantageous.

    National Insurance – State Pension Top Up

    From 6 April 2023 the ability to make top up payments for earlier years is significantly reduced.

    Currently many people can make catch up Class 3 NI payments all the way back to 6 April 2006 to fill any gaps in your state pension qualifying years. From this April this is being reduced to 6 years, which is still valuable and will be sufficient for many people.

    If you’re not sure, you need to check your Personal Tax Account, which despite its name also shows your state pension.

    Research & Development

    One major change from this April is the reduced cash credit for tax loss-making SMEs. The effective value is currently 33.35% but this is being reduced by nearly a half to 18.6%. (The government is punishing SMEs for the poor practices of non-qualified companies set up to claim cash backs.) You may therefore wish to check whether some costs can be brought forward to access the current higher cashback rate.

    On the other hand, if you’re profitable with over £50k profits your marginal tax rate will be increasing by at least an absolute 6%. The combination of this rate increase and the reduced credit from 230% to 186% is a net value increase from 43.7% to 46.5% for R&D spend from April 2023.

    The increase in the value of a tax credit under the alternative RDEC scheme is a net tax credit of 15%, still lower than the percentages above, meaning it may remain less appropriate for many SMEs. 

    If a major part of your claim is overseas contractors, these will no longer be eligible and you may wish to bring some of those forward if possible. However, if you’re looking forward to claiming data and cloud hosting as an R&D cost, these become eligible from April and a delay might work out depending on the project plans.

    The requirement to provide more details is already fulfilled when On The Spot Accountants make claims. If the advance notice of a claim ends up in the final legislation we’ll be keeping in touch with you to ensure a notification is submitted even if it’s a protective one. Happily, most client tax returns are easily submitted within the 6 month required timeframe which may supersede the need for any advance notification at all!

    Super Deduction 130%

    As this ends on 31 March 2023, bringing forward a large capital spend might be worthwhile saving an effective 24.7% of corporation tax. However, as this was only a way to mimic the 25% increased corporation tax rate from 1 April 2023 and has certain restrictions, if you have profits over £50k, capital spend is likely to save you more, 25%/26.5%, corporation tax by waiting until 1 April 2023.

    Capital Gains Tax

    If you’re about to exchange on an asset, you may want to ensure this definitely happens before 5 April 2023, after which your tax free annual exemption of £12,300 is reduced by more than half to £6,000. For a couple selling a buy-to-let property this might cost tax of up to £3,528 for the sake of a few days.

    Likely, more valuable, is the increase in corporation tax for companies who might save 6% on the whole gain by exchanging before 1 April 2023 and if your year end isn’t 31 March, it might be worth changing it!

    You’ll see there are some twists and turns with these changes, sometimes bringing forward plans is the better answer, sometimes delaying plans is better. Each taxpayer is different and you should only act after being advised about all the financial impacts of your actions. In particular, some changes have slightly different effects if your year end is not 31 March.

  • Budget 2020 – A pot-hole free drive in your electric car through magic money trees?

    There is much to be happy about in today’s Budget, where the magic money trees are well and truly thriving!

    Businesses will benefit from many announcements, particularly those who trade from a property, have one or two employees, and need a new car!

    Business rates are abolished for a year for rateable values of less than £51k and these same businesses will receive a £3k grant, as a response to the Coronavirus but it’s also part of the overall picture of dealing with competition from Amazon and other online retailers.

    Where possible and appropriate for your business model, businesses going forward may need to embrace online retail further. Having said that, many can provide a niche, local, personal service perhaps relying on online marketing, such as Facebook, but not online sales.

    With the money saved, and assuming you needed one already, an electric car is very tax efficient. The 100% write off against your tax bill has been extended beyond 2021 to 2025 with no benefit in kind until March 2021 and then minimal after that. VAT still can’t be recovered, however, apart from 50% through leasing.

    Your employees earning over £9,500 will pay less national insurance from April 2020, but you’ll still pay 13.8% national insurance on their salaries over £8,788 with a £4k offset from the increased employer annual allowance of £4k. For example, if you have one employee earning £37,774, the £4k annual allowance will offset all the employer national insurance due. Even employ a veteran where you save employer’s NI for a year. And remember to claim the statutory sick pay for up to 2 weeks if your employees need to be away from work due to the Coronavirus.

    If you’re a sole trader, your Class 4 national insurance of 9% will, from April 2020, only kick in after you’ve earnt profits of over £9,500. If the Corornavirus reduces your profits, however, remember to claim Universal Credit. You may need to pay Class 2 national insurance voluntarily to maintain your state pension credit.

    If you also carry out Research and Development, R&D, the new restriction on cash refunds for loss making businesses is still coming in, but delayed until April 2021, and if your claim is less than £20k, there’ll be no restriciton at all. So, as you were! Carry on with R&D and cash claims even if you are just a one or two director company on minimal salary.

    If your business survives the Coronavirus, perhaps with funding help from HMRC Time To Pay or your bank and one day you’re ready to sell your business, you’ll pay capital gains tax of 10% on the first and only £1m business capital gain in your lifetime, and 20% on the rest of the gain. Many small businesses are sold for less than £1m, so this is a welcome compromise effective immediately.

    Some of the good news is ofset by confirmation of the corporation tax rate remaining at 19%, but also HMRC being given 1,300 more staff to get tax HMRC believes it’s entitled to! Be careful you don’t get caught up in that, where HMRC have been known to go for low hanging fruit, possibly hanging on a magic money tree 😀, rather than trickier cases. 

    Stay well! 

  • On Non-Budget Day, 5 Tax Planning Tips You Can Rely On.

    1. Incentives to innovate such as research and development (R&D) tax relief are likely to continue. Linked to these are enterprise investment schemes (SEIS and EIS) as a way of encouraging investment into certain companies. Therefore, you could take the view to not hold back and carry on planning for these to be around. You business is also likely to receive 100% capital allowances on its capital spend. Keep calm and carry on!
    2. Low salary and high dividends remain likely to be tax efficient. With owner-managed companies, the shareholder-director has two capacities: as a shareholder and as a director. As long as this distinction remains, and national insurance remains high, it seems hard to see how a high salary can be more tax efficient than taking dividends.
    3. The company car has been restored! As long as it’s electric. From 6 April 2020, the taxable benefit, including ‘fuel’, will be £ZERO for all 100% electric cars. It will also be £ZERO for new hybrid cars registered on/after 6 April 2020 with up to 50g/km emisisons and at least a 130 mile range. The rates increase a tiny bit in later years, but it’s still likely to be a good option for your company, particularly if you take into account the company also saves tax on 100% of the cost in the year of purchase.
    4. Always at least consider making pension contributions. These work well for profitable companies when owners have taken all the dividends they need or want within the tax brackets and thresholds, and at the same time, they save corporation tax. Although higher rate tax relief for income tax may be reviewed, it would be a brave Chancellor to take away pension freedoms. Therefore you could arrange for company contributions to be paid into your pension scheme, wait until only age 55 to take, say, 25% out tax free, but delay taking the entire pension until later. Admittedly the 25% tax free part may be at risk, but I wouldn’t expect that to be brought in overnight. And you could at least still take your pension when your income tax rate is low, for whatever reason. Please take IFA advice along the way.
    5. Business and tax year ends – timing of income, costs, dividends. Always remember your company year end date eg 31 March and the tax year end of 5 April and ensure that you use them well. For example, when you pay interim dividends, don’t pay them on 5 April if you want it to be taxed in the next year. If making company pension contributions as referred to above, make sure the company pays them before the company year end, otherwise the corporation tax relief is delayed by 1 year. Finally, if you’ve made losses investigate if you can get a tax refund whether you’re a sole trader, partner or limited company.

    Conclusion

    Of course, no-one knows what will actually happen, so please know there is some risk with any decision you take. Just take good advice and then decide!