For the majority of people, tax planning isn’t the most enjoyable of tasks, and it’s easy to see why. The UK tax system is one of the longest and most convoluted systems in the world, standing at 22,000 pages. That’s the equivalent of 97 copies of Harry Potter and the Philosopher’s Stone back-to-back.
Don’t be fooled into thinking this is the sign of a robust system. Rather than rewriting parts of the tax system as things change over the years, legislators have chosen to just update it instead. So, here are five top tips that should help you navigate our complex tax legislation, to make tax planning hopefully less painful and potentially help reduce your tax bill too.
Work ahead of the deadlines
Most people know the standard UK financial year runs from 6th April to 5th April, and for those it is applicable to, self-assessment tax returns are due by 31st January. Now, although people have almost a year to complete their tax return, it is not uncommon for them to put off doing it until January.
Not only can this induce unnecessary panic, but it can also lead to your rushing tax calculations and potentially making mistakes that could result in fines and penalties from HMRC. The biggest tip for tax planning is to remember the dates and get started early, ensuring there is sufficient time to do all the necessary calculations. It’s also important to keep up to speed with other important financial dates, such as when payroll reports need to be submitted.
Keep up to date with tax changes
Announced during the Spring Budget and Autumn Statement, tax changes tend to occur most years, which can cause a headache when tax planning. So before starting any tax calculations, it’s important to understand if there have been any changes to tax regulations, how they might impact your business and personal finances, and what possible strategies might be available to counteract any increases.
As an example, in April 2024 the tax-free allowance for dividends was halved. Whilst this won’t directly impact taxable profits, it might see directors and stakeholders looking at the option of an increased potential salary as a means to reduce their personal tax bill. This could impact business taxation in other areas.
When lots of changes are made at once, or are complex, consulting with a tax advisor is critical.
Utilise tax reliefs
Corporation tax is something all profitable limited companies must pay, it’s unavoidable. However, there are varying forms of tax relief that may help reduce your tax bills dependent on your circumstances. Too many businesses ignore the relief options and simply miss out on the savings. So, if you are eligible for tax reliefs, make sure to use them wherever possible.
Research and Development (R&D) is one form of tax relief that some businesses can apply for. Whilst the criteria for R&D tax credit has gotten far stricter in recent years, it’s worth investigating the potential for a claim if your business is actively improving existing products and processes or developing new ones. If you think your business could qualify, consult with an accountant to assist with the complex calculations and application process.
The Annual Investment Allowance (AIA) is another form of tax relief available for businesses that undertake qualifying capital expenditure. This means businesses can invest in up to £1 million of new equipment and machinery which can then be deducted from their taxable profits. Like most forms of relief, there’s a specific criteria, so a tax advisor who specialises in claiming capital allowances is likely the best port of call for getting advice.
Weigh up income vs. retained profit
Another thing to consider that is often missed in tax planning is managing income. There are many ways income can be strategically managed as a means of reducing tax liabilities. One of the more common strategies is delaying the sale of goods, or services, so that they fall in the following tax year. This can be particularly effective when predictions for the following year aren’t looking as profitable as the current one.
Retaining profits can also prove more tax-efficient for shareholders, as historically the rate of income tax is higher than the rate of corporation tax, although this would need confirming by a professional who would look at the company’s profit extraction plan. Retaining profits may also be useful for future investments, reducing the amount of additional potential funding that might need to be raised.
Make sure you claim on expenses
You might not be aware, but claiming on business expenses can be a great way to reduce your tax bill. Whilst you can’t claim for every expense, you can claim on:
- The purchase of commercial property
- Staff training costs
- Events for employees, such as a summer or Christmas party
- The purchase of new electric vehicles
There are slightly different rules for each type of expense, so if you are planning to make lots of claims it’s probably wise to meet with a tax advisor to ensure you are working within the guidelines.
On the surface, tax planning can seem daunting, but start by using these five tips as a base from which you can effectively work from. Of course, every business has its own set of unique circumstances, so contact an accountant for advice tailored to your business’ needs.
By Beth Whitmore, Partner at Wellers.
