Tax planning
The tax decisions worth making before the year ends
Filing a return records what already happened. Planning changes what happens. This is the work we do with clients in the months before a year end, when the outcome can still be influenced.
Director remuneration: salary versus dividends
For most owner-managed companies the efficient answer is a modest salary plus dividends. The salary is a deductible cost for the company and, set at the right level, preserves a qualifying year towards the state pension without creating a meaningful National Insurance bill. The balance is then taken as dividends, which carry no National Insurance but are paid out of profits after corporation tax.
The right salary figure moves with each Budget, and the calculation changes if there are other employees, if the Employment Allowance is available, or if you have income elsewhere. It is a five minute review every year that is worth doing properly.
Dividends must be supported by distributable profits, a board minute and a dividend voucher. Without those, HMRC can treat the payment as salary or a loan.
Allowable expenses and capital allowances
An expense is allowable when it is incurred wholly and exclusively for the business. That test decides most arguments. Equipment, vehicles and larger assets are treated differently again: they are capitalised and relieved through capital allowances.
- Annual Investment Allowance giving full relief on qualifying plant and machinery
- Full expensing on qualifying new plant and machinery for companies
- Commercial vehicles and vans, which are treated far more generously than cars
- Cars relieved by writing down allowances, with the rate driven by emissions
- Home working, mileage and use of home allowances applied correctly
- Training, professional subscriptions and the costs that are commonly missed
Pension contributions and profit extraction
Employer pension contributions are usually deductible for corporation tax and avoid both National Insurance and income tax at the point of payment. For a director with profits they do not need immediately, this is often the most efficient extraction route available.
The annual allowance caps what can be contributed with tax relief, and unused allowance from the previous three tax years can often be carried forward. Higher earners face a tapered allowance, so the calculation needs care before a large contribution is made.
Property, capital gains and inheritance
For property investors, the main questions are how the property is held, how finance costs are relieved and what a future disposal will cost. UK residential disposals must be reported and paid within 60 days of completion, which catches people out repeatedly.
On capital gains generally, timing matters: spreading disposals across tax years, using both spouses' annual exempt amounts and considering available reliefs can change the bill substantially. Business Asset Disposal Relief may reduce the rate on a qualifying sale of a business, subject to a lifetime limit.
Inheritance Tax deserves an early look rather than a late one. The nil rate band, the residence nil rate band, lifetime gifting and the reliefs available for trading businesses all interact, and the planning that works best is the planning done in good time. We will give you an overview and work alongside a solicitor where wills or trusts are involved.
What this means for you
Every one of these reliefs already exists in HMRC's own rules; the value comes from using them at the right time, not from anything unusual. Left until after the year end, most of these decisions simply become historical facts rather than choices.
A short review before your year end, with real figures in front of us, is what turns these reliefs into an actual reduction in what you owe.
Year end review
What we look at in a planning meeting
Held two to three months before your year end, with the figures in front of us.
- Projected profit and the corporation tax that follows from it
- Salary and dividend levels for the rest of the year
- Whether planned equipment purchases should fall before or after the year end
- Pension contributions, including allowance carried forward
- Directors' loan account position and any s455 exposure
- Bad debts, stock and work in progress that should be recognised
- Cash set aside for tax, checked against the dates it is due
Questions
Tax planning FAQs
Book a tax planning review before your year end
Bring your figures and your plans for the next twelve months. We will tell you what to do differently and what it is worth.