At a glance
- Corporation Tax increases in 2023 for firms with profits of more than £50,000.
- Businesses can respond to these higher taxes in a number of ways, including making the most of available allowances and credit schemes, and reassessing their corporate structure.
- Changes to how much tax you pay as a limited company owner and how dividends are taxed mean that it could be worth reviewing how you withdraw an income from your business.
In the past two years, small and medium-sized enterprises (SMEs) have faced a troubling swathe of changes to the business and personal tax regimes, including significantly higher Corporation Tax rates for many. Bigger HMRC bills this year are forcing firms and their owners to adjust plans and look for ways to soften the blow.
With a pressing need to mitigate the impact of higher taxes, you don’t want to miss any tax-planning opportunities in case they get removed. The good news is there are still ways you can legitimately review your tax plans and structures to benefit your overall finances. So, now is the time to look at your tax and personal financial plans to ensure you still have the best structure possible.
The Corporation Tax increases hit all companies with profits of more than £50,000 a year, from April 2023. The previous main rate of 19% changed to a more complex system of rates tapering between 19% and 25%, depending on your profits. That means businesses at the higher end of the range (profits of more than £250,000) have suffered a severe increase of six percentage points.
Experts say the new business tax rates have increased financial stress on many companies and reduced distributable profits. These companies have had to forecast and manage their cash flow carefully, to plan for and mitigate the higher tax bills. They may have had to review business plans to ensure growth and funding assumptions are still realistic, as well as think hard about how they can maximise other tax reliefs.
For firms still facing these pressures, here are some tax-saving tips that could help.
1. Take advantage of capital allowances
Firms planning capital spending – including on items such as computing equipment – should consider using the attractive ‘full expensing’ allowance, which was due to end in 2026 but is now permanent. Full expensing allows you to claim a 100% deduction from taxable profits on investments in qualifying plant and machinery.
Richard Jones, Senior Technical Manager at the Institute of Chartered Accountants in England and Wales (ICAEW), points out that if you’re paying a higher rate of Corporation Tax in 2024, this benefit is even more valuable.
However, it requires careful planning based on your company’s circumstances. For example, loss-making companies may choose not to claim full expensing on expenditure incurred in the period of the expenditure so as not to create additional tax losses. However, it can only then claim allowances on this expenditure in subsequent years on a written-down basis as the value of the investment depreciates.
2. Use research and development (R&D) relief
If your company has been involved in a project that seeks to advance science or technology, you could claim the valuable R&D tax relief. For SMEs, this allows you to deduct 86% from your annual profit, in addition to the standard 100% capital allowance, offering up to 186% deduction in total. However, there are strict conditions, and you must plan this carefully to ensure your claim is robust and well documented.
The R&D scheme has undergone significant reform recently, including an increase to the Research and Development Expenditure Credit to 20% in April 2023. The R&D regime for SMEs is also being merged with the scheme for larger companies for accounting periods commencing on or after 1 April 2024.
“As the merger’s impact may vary for each company, it’s worth planning when R&D takes place to maximise the relief available,” says Richard. However, he emphasises that R&D planning is driven by multiple factors that could be more important than tax reliefs.
3. Look at your group structures
Under the 2023 Corporation Tax changes, tax limits will reduce in proportion to the number of associated companies. Associated means one company controls another, or both are under common control. If your company has a group structure or common controls, consider whether a different structure would be more beneficial.
4. Reassess your corporate structure
You may also wonder whether it’s still worth operating through a limited company compared to being a sole trader, given the Corporation Tax increases. Analysis by Accountingweb shows limited companies are still marginally more tax efficient for companies with lower profits1. But incorporation comes with an administrative burden that some may see as no longer worth the thin savings.
Simon Martin, Chartered Financial Planner, Technical Connection, says: “With all the changes, ensuring you’re trading in the most efficient way is sensible. But this is a complicated topic, with many potential ramifications around tax planning, personal finances and other factors. Seek professional advice, ideally from a team of tax and financial planners, before making any decision.”
5. Review your personal taxes and how you draw income
As a business owner, you could also be affected by recent changes to the personal tax regime, such as thresholds being frozen until 2028. This could increase your personal tax liability as inflation bites and more income typically falls into higher-rate bands. Plus, the additional-rate Income Tax threshold cut from £150,000 to £125,140 brought more taxpayers onto the higher rate of 45%.
And in Scotland, the higher and top tax rates increased to 42% and 47% respectively from April 2023. From April 2024, the top rate will rise again to 48% and a new ‘Advanced rate’ of 45% will apply on income from £75,000 to £125,140.
Simon says that all the recent changes make now a good time to review how you draw money from your company.
For example, the dividend allowance will halve from £1,000 to £500 from April 2024. So, it may be worth advancing dividend payments if you have not yet used your full allowance, he says.
You might also consider increasing pension contributions, assuming you don’t need the funds until you’re 55 (57 from April 2028). “Pensions are one of the most tax-efficient ways to extract money from your business,” says Simon. “The Corporation Tax introduced last year may also prompt business owners to boost pension contributions further.”
From 2023/24, the annual pension allowance has increased from £40,000 to £60,000; the lifetime allowance of £1,073,100 will be taxed at nil and removed in 2024/25. These changes could hugely help in offsetting other tax rises and are a key consideration in any financial-planning review.
If you haven’t looked at your remuneration and personal financial plans recently, we recommend you do so urgently to ensure they remain optimal.
Alongside your accountant, we can help you keep your financial plans on track. Contact us today.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
Source
1Accounting Web, ‘Should you still advise growing businesses to incorporate?’, March 2023
SJP Approved 08/03/2024