Introduction to Tax Planning
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What is Tax Planning?
Tax planning is an important financial strategy for self-employed individuals and businesses. It means arranging your financial affairs to reduce the amount of tax you pay (your tax liability) within the bounds of the law. Effective tax planning involves understanding HMRC regulations, allowable deductions and credits to make informed decisions that can legally reduce the tax you owe.
The Essence and Goals of Tax Planning
The essence of tax planning is not about avoiding paying taxes but about ensuring you pay only what you are legally required to. It involves foresight, an in-depth understanding of the tax system, and keeping up to date with the latest tax laws and regulations, which change from year to year. The ultimate goal is to create a strategy that maximises your after-tax income, helping to preserve wealth and secure financial stability.
Strategic Implementation
Effective tax planning starts with assessing your current financial situation and understanding your short-term and long-term financial goals. It involves making prudent choices about investment vehicles, retirement planning, and estate planning and understanding the tax implications of different business structures and transactions.
It is essential to approach tax planning within the ethical and legal framework established by HMRC. Aggressive tax avoidance schemes and unethical practices undermine the tax system and can result in significant legal and financial penalties and reputational damage. That is why it is important to involve an experienced accountant who knows the difference between sensible tax planning and unsavoury practices: get in touch with Jack Ross today to organise a free 15 minute consultation.
In this article, we focus on a variety of tax planning strategies for businesses.
Making Pension Contributions
Contributing to a pension scheme is a wise move for retirement planning and a tax-efficient strategy for businesses and their employees. Employers can deduct pension contributions as a business expense, reducing their Corporation Tax bill. These are not subject to National Insurance Contributions (NIC). This approach benefits the employer and the employees by providing future financial security while reducing the amount of tax currently being paid.
Paying Bonuses
Employee bonuses are a useful way to manage business income and tax liability, especially if the company has had a profitable year. By awarding bonuses, businesses can decrease their taxable profits, reducing their Corporation Tax liability. Issuing bonuses before the year-end is essential to ensure they are deductible in the current financial year. Remember, while bonuses reduce Corporation Tax, they are subject to income tax and NICs from the employees’ perspective.
Bringing Forward Expenditure
If you anticipate significant income in the current year, consider bringing forward any planned expenditure to reduce your taxable profit. This could include making early purchases of equipment or supplies, renovating business premises, or accelerating marketing campaigns. By incurring these expenses in the current tax year, you can lower your immediate tax liability, albeit at the cost of reducing potential deductions in future years.
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Claiming all Possible Allowances and Expenses
Ensure you claim all allowable business expenses and capital allowances. This includes office supplies and travel expenses, as well as more significant items like machinery and business vehicles. Reviewing all expenditures can uncover additional deductions, reducing the amount of tax you pay.
Reviewing Stock and Inventory
Evaluate your stock and inventory levels before the year-end. Writing off any obsolete or unsellable stock can reduce your taxable income. Ensure you properly document any stock write-offs and dispose of the items accordingly to comply with tax regulations.
Increasing Charitable Contributions
Charitable contributions made by your business can reduce your total taxable income. To qualify for tax relief, ensure these donations are made to registered charities and properly documented. Besides the tax benefits, charitable giving can enhance your business’s social responsibility profile.
Utilising Losses
If your business has experienced losses, consider how these can be used to mitigate tax. Carry-back provisions allow you to offset losses against previous years’ profits, resulting in a potential tax refund. Alternatively, carrying forward losses to offset future profits can reduce tax liabilities.
Dividend Distribution
Perfecting the balance between salary and dividends can reduce overall tax liability for business owners and shareholders, considering dividends are taxed at a lower rate than salary beyond the personal allowance and NIC thresholds. However, dividends can only be paid out of profits, so this strategy needs to be balanced with the company’s overall financial health and cash flow requirements.
Planning for Capital Gains Tax (CGT)
If your business plans to dispose of assets, consider the timing to manage the CGT liability. Utilising the annual exemption, spreading disposals, or reinvesting the proceeds into qualifying assets can reduce the CGT impact.
Significance of Marginal Relief in Corporation Tax:
Marginal Relief is crucial for businesses with taxable profits exceeding £50,000 but not more than £250,000. These companies transition from paying Corporation Tax at 19% to a higher rate of 25% for profits above £250,000. Marginal Relief gradually increases the effective tax rate, preventing an abrupt jump to the higher tax rate. It is calculated by applying a formula that reduces the tax burden, helping businesses maintain financial stability as they grow.
Benefits of Research and Development (R&D) Tax Credits for Businesses:
R&D tax credits allow businesses to claim back up to 33% of their qualifying R&D expenditure as a tax credit for loss-making companies and up to 230% for profit-making companies. This can cover staff salaries, subcontracted research costs, and materials used in R&D projects. This incentive supports innovation by reducing the overall cost of R&D activities, potentially leading to significant tax savings and improved cash flow for businesses investing in research and development.
Qualifications for the Annual Investment Allowance (AIA):
The AIA permits businesses to deduct the total value of qualifying items up to a limit of £1 million (as of the current tax year) directly from profits before tax. This covers most Plant and Machinery, excluding cars. The AIA aims to encourage businesses to invest in assets by providing immediate tax relief, thus reducing the year’s taxable profits and tax payable.
Capital Allowances for Commercial Properties:
Capital allowances for commercial properties allow businesses to write off the costs of integral features and fixtures against taxable income. This includes elements like lighting, heating, water systems, and lifts. Businesses can claim these allowances on items that remain within the property and are used for business purposes, which helps reduce their taxable profits and their Corporation Tax bill.
Tax Benefits of Employing Apprentices:
Businesses employing apprentices under 25 may be exempt from paying employer National Insurance contributions for these employees on earnings up to the Upper Secondary Threshold. This can lead to significant savings, reduce employment costs, encourage businesses to hire and train young workers and support the development of a skilled workforce.
Providing a Trivial Benefit for Tax Purposes:
A trivial benefit costs £50 or less, is not a cash or cash voucher, is not a reward for work or performance, and is not part of the employment contract. Employers can provide these benefits without reporting them to HMRC or paying taxes and National Insurance. Examples include occasional team lunches, small birthday gifts, or flowers. There is no tax liability on these items for either the employer or the employee, promoting a positive work culture.
Benefits of Switching to Green Company Vehicles:
Switching to green company vehicles, such as electric cars, offers tax benefits, including lower Benefit in Kind (BiK) rates and a 100% First Year Allowance on electric car purchases. This can result in significant tax savings for employers and employees, lower fuel costs, and reduced environmental impact. These incentives encourage businesses to invest in environmentally friendly transport solutions.
Importance of Accurate Record-Keeping for Tax Planning:
Maintaining accurate and detailed records is essential for effective tax planning and compliance. Good record-keeping allows businesses to identify allowable expenses accurately, prepare precise tax returns, and substantiate claims if HMRC queries them. This practice helps maximise deductions and avoid penalties, ensuring businesses only pay the tax they owe while taking advantage of all available reliefs.
Professional Tax Planning Advice
It is important to consult with a professional for complex tax matters or personalised advice. At Jack Ross our team has a wealth of experience with tax planning, ensuring our clients only pay what they have to and not a penny more.
Contact us at 0161 832 4451 or use the contact form below to book a free, no-obligation introductory meeting with one of our tax advisors.