Most unincorporated businesses now have a year end which aligns with the tax year and many companies have a 31 March year end. As the 2024-2025 year end is fast approaching, now is the time to review your business finances to make sure you are taking full advantage of available allowances and tax reliefs.
Please note that throughout this article when we mention spouses and married couples, we are also referring to civil partners.
Basis period reform for the self-employed
From the 2024/25 tax year onwards sole traders and partners are now taxed on profits earned in the tax year. Where taxpayers’ previous year ends were not between 31 March and 5 April, in 2023/24, they were tax on more than 12 months’ profits that year with the additional profits able to be spread over 5 years. We will be reviewing annually whether to bring into charge the minimum each year, or whether it would be beneficial to bring more of those spread profits into charge (for example where they may be taxed at a higher rate in a later year).
Annual Investment Allowance
Timing of capital spend on plant and machinery is key as it reduces tax liabilities in the year incurred, so making a purchase (and bringing it into use if on finance) before the year end will accelerate tax relief by a year.
Tax relief on most cars is less generous as you normally only get a writing down allowance, not full tax relief in year one. Cars which emit no more CO2 than 50g/km get a writing down allowance of 18%. For those which emit more than 50g/km, the rate is just 6% per annum.
However, first year capital allowances of 100% are available on new electric cars (i.e. with no CO2 emissions) up to 31 March 2026 for companies and 5 April 2026 for sole traders and partnerships.
Family businesses and profit extraction
Where you are running a company, a low salary high dividend profit extraction policy may no longer be quite right for you, given the higher corporation tax rates we now have. However, we also need to factor in the increase in Employer National Insurance. Bespoke profit extraction planning has never been quite so important.
Salaries and bonuses are tax deductible in the company, whilst dividends are not. Profits up to £50k are taxed at 19% and those over £250k at 25%. Profits falling the in £50-£250k band have a marginal rate of 26.5% (because of how marginal relief works) so, if personal income is tax deductible in the company, this may be more tax efficient than drawing a dividend especially if profits are in this band.
Individuals have a dividend allowance of £500 per tax year. This is not carried over so is wasted if not used. Therefore, a dividend of at least that amount is normally recommended where sufficient distributable profits exist.
Where you run a business with your spouse it would be wise to look at your profit-sharing arrangement or, if you are self employed and your spouse works in the business, it might be financially beneficial to pay them. However, wages would need to commensurate with the work they actually do, and it may mean you have to set up a PAYE scheme.
Planning for the increase in employer National Insurance
Employer National Insurance is increasing from 13.8% to 15% from 6 April 2025 at the same time the level employers start to pay reduces to just £5,000. The employment allowance is increasing to £10,500 which will mean some of the smallest of employers will be unaffected by the changes.
However, single director companies cannot claim the Employment Allowance and these changes may impact their profit extraction policy. Whilst pensioners no longer pay National Insurance themselves, the employer does, so those with state pension age directors and/or employees are also impacted by these changes.
It is a good time to review your staffing costs in general.
Ideas to help mitigate these costs:
If you are a single director company, would there be scope to employ family members?
Offer salary sacrifice schemes, such as a tax efficient company car or employer pension contributions (you would need the appropriate advice to ensure compliance)
Offer flexible working arrangements, such as additional holidays
Review your workforce and consider whether hiring part time workers or freelance contractors might offer financial savings
End of the double cab pickup rules
Capital allowances:
For expenditure incurred on or after 1 April 2025 for Corporation Tax and 6 April 2025 for Income Tax, double cab pickups will be classed as cars so the only allowances will be a writing down allowance of 6%, rather than the current 100% available under the Annual Investment Allowance.
Transitional arrangements apply when an amount of expenditure is incurred on a double cab pick-up as a result of a contract entered into before 1 April 2025 for Corporation Tax and 6 April 2025 for Income Tax and the expenditure is incurred before 1 October 2025. In these circumstances a double cab pick-up with a payload of one tonne or more will continue to be treated as a commercial vehicle.
Benefits in kind:
From 6 April 2025, double cab pickups are to be treated as cars for tax purposes where these are provided as a benefit of employment, meaning far higher tax charges for employees and National Insurance costs for employers.
Transitional arrangements will apply for employers who have purchased, leased, or ordered a double cab pickup before 6 April 2025, whereby they will be able to rely upon the previous treatment until the disposal, lease expiry, or 5 April 2029, whichever comes first.
VAT:
For VAT purposes double cab pickups are classified based on payload capacity, with anything under one tonne classified as a car, and anything a tonne and over as a van. This has not changed.
Changes to Business Asset Disposal Relief (BADR)
BADR operates by applying a lower percentage of Capital Gains Tax (CGT) for individuals on certain disposals. BADR is a valuable relief for business owners when they sell their business, or qualifying shares in a trading company.
If conditions are met, sellers are currently only liable for CGT at a reduced rate of 10%, subject to a lifetime limit of £1 million. Following changes made by the Budget, qualifying disposals after 6 April 2025 will be taxed at 14% and, from 6 April 2026, 18%.
Taxpayers may want to consider accelerating disposals to take advantage of lower tax rates.
Do you have an up to date partnership agreement?
Where you are trading in a partnership and are doing so without a partnership agreement, then you really do need to get one in place with the correct legal help. Disputes about ownership division, responsibilities and the distributions of assets are examples of complications which can occur without one. In the absence of a written agreement the Partnership Act 1890 will apply, which may not contain the provisions you would like.
Do you have shareholder agreement?
As companies often have more than one shareholder, agreements are useful in controlling how business is to be conducted. In the event of disputes, they clarify matters and also deal with any unexpected events. They provide protection to shareholders for their investment, establishing an agreed relationship between the members.
Conclusion
If you want to talk to us about any of the points raised, please get in touch as we are here to help.
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