The UK’s tax system is complex. Spanning more than 22,000 pages, it’s more words than most people will read in their lifetime. This means that corporate and personal tax can be a minefield for small business owners. Couple this already complex system with consistent regulation changes, and it’s very difficult for business owners to have a firm grip on their tax affairs which could mean they end up paying more than they need to.
Planning is the key to ensuring your business’ tax affairs are as efficient as possible.
Effective corporate tax planning uses strategies that reduce your business’s tax liability. Not only will this mean your business will pay less tax, but it will also improve your net profit margin. Of course, the strategies used must be legal or you risk a tax investigation and subsequent penalties and fines from HMRC, but a qualified accountant will be able to advise you on the best and most appropriate policies you can adopt.
Understanding tax thresholds
The first step to all of this is understanding the tax changes and how they may affect your business. Tax changes are usually announced by the Chancellor during either the Spring Budget, or Autumn Statement, or both. These announcements are then typically, but not exclusively, enacted the following tax year.
In 2024, the most notable changes are to the tax-free allowances for capital gains tax (CGT) and dividends, which have both been halved. Alongside this, the pensions lifetime allowance (LTA) has been scrapped and ISA rules have been made simpler to encourage investment. Elsewhere, National Insurance (NI) has been reduced in most cases.
This is all well and good, but these changes will affect all businesses differently. So, whilst it’s good to have an awareness of the broader changes to the UK’s tax system, it’s best to work with a qualified accountant who will do the analysis for you to understand how your business could be impacted, and the strategic options available to you.
Your corporate tax liabilities
Almost all limited companies, no matter the size, will be familiar with Corporation Tax (CT). The main rate of CT is 25% (previously 19% until it was raised in 2023) for businesses that turn a profit of £250,000 or greater. At the other end of the spectrum, businesses with profits less than £50,000 pay a main rate of 19%. However, many businesses will sit somewhere in between. When this is the case, CT is tapered to a rate between 19% and 25% depending on the profit made. It is worth noting that the effective rate of tax for profits that fall within this banding is 26.5%.
Whilst CT is standard for most businesses, some still get in trouble with HMRC by leaving it too late to calculate the tax owed, leaving them with not enough money in reserve to pay the tax bill. So, the sooner you understand the size of your tax bill, the longer you have to set money aside to make payment.
Reducing your tax bill
Whilst paying some form of CT is somewhat unavoidable if you’re a profitable business, there are ways you can legally reduce your tax bill. For example, you could claim Research & Development (R&D) tax credit. These are available to businesses that are actively making improvements to existing processes or exploring new ideas and initiatives. The idea is that offering tax breaks like this will encourage businesses to invest in innovation and stimulate growth in the UK economy.
There’s also the Annual Investment Allowance (AIA) to consider. This allows up to £1 million of qualifying investment to be deducted from profits, ultimately reducing the amount of CT owed. AIA is available to any business that has invested in specific plant and machinery. This includes IT equipment, office supplies, agricultural machines, and essential building infrastructure such as air conditioning.
This list is by no means exhaustive, but it should give you a quick insight into the breadth of ways that your business’s tax bill could be reduced.
Final thoughts
There’s no escaping tax in its entirety. Waiting until the deadline is just weeks away only limits your potential ability to reduce the amount you’ll need to pay and budget. No two people’s circumstances are the same, so to ensure your business and personal tax affairs are as efficient as possible, it’s best to work with a tax advisor who can evaluate and plan around your unique position.
