5th April is right around the corner, and we know what that means…. that’s right, it’s Easter Sunday, but it’s also the date where the UK tax year comes to an end. So, whilst others may be checking to see if the Easter Bunny has been, many business owners will see this as a deadline to review their finances and ensure they’re taking full advantage of available tax efficiencies.
Putting your sole-focus onto the Easter eggs and roast dinner on the days up to the 5th April can mean missing opportunities to reduce liabilities, rewarding employees, and extracting profits from your business in the most tax-efficient way.
To make sure you can enjoy your Easter Sunday with the only guilt being how much chocolate you’ve just consumed, it’s a good idea to take a proactive approach to your finances now before the end of the tax year.
For many owner-managed businesses, whether you’ve taking a salary or a dividend, or a mixture of the two, from your business, the balance between salary and dividends plays a key role in tax efficiency.
Remember – salaries are subject to income tax and national insurance, whereas dividends are taxed at different rates and do not attract national insurance.
Before April, make sure you’re taking full advantage of:
The personal allowance can be a powerful tool for sole traders. Remember, once you start earning above £100,000 the government will reduce your personal allowance by £1 for every £2 earned above £100k (keep this in mind when we discuss recording expenses and purchases later on in this blog).
Also, if your company has retained profits then consider declaring dividends before 5th April as this might be a way to help you utilise any remaining dividend allowance.
For companies, pension contributions are a good way of extracting profits from your company in a tax-efficient manner. This is because they are usually deductible for corporation tax and do not attract employer or employee national insurance.
For sole traders, contributing to a pension can:
- Provide tax relief on contributions
- Help build long-term financial security
If you’ve had a profitable year, increasing your pension contributions before the tax deadline could reduce your income tax bill.
It is often easy to forget about your payments on account, and this can lead to cash flow surprises. If your profits have dropped this year, consider applying to reduce your upcoming payments on account. This is a good way to avoid overpaying on your tax and damaging your precious cash flow!
If you know you’ll need certain services or purchases soon, consider bringing them forward into the current tax year to reduce your taxable profits.
Some costs might include paying for annual software subscriptions or booking training courses. Timing expenses strategically can smooth profits and reduce your immediate tax liability.
If your business has plans to invest in equipment, technology, or tools, then now might be the time to do it to claim valuable tax relief.
The Annual Investment Allowance (AIA) allows businesses to deduct the full value of qualifying equipment purchases from their taxable profits, up to the annual limit of £1 million – a very valuable allowance!
Before the tax year closes, it’s a good idea to make sure you aren’t missing out on legitimate expense claims by checking whether all legitimate business expenses have been correctly recorded. Common allowable costs include:
- Office supplies and equipment
- Software subscriptions
- Professional fees, e.g. accountants
- Marketing and advertising
- Travel costs for business purposes
- Home office expenses if you work from home
Ensuring everything is properly recorded can significantly reduce your taxable profit.
In some circumstances, trivial benefits, such as gift cards or small hampers, can be provided to employees and directors without creating a taxable benefit.
The benefit must be for £50 or less, not be cash, and not be a reward for hard work. For directors of close companies, the annual cap is £300 which means up to six of these £50 benefits can be given tax-free before April.
For limited companies who might have taken money out of your company during the year, it’s important that you review this before the year end. This is because overdrawn loan accounts can trigger additional tax charges if they are outstanding nine months after the year end.
Planning repayments or restructuring before the year closes can help avoid unnecessary tax costs.
Now is the time to get on top of your bookkeeping ahead April. Makes sure that you’ve:
- Recorded all of your invoices
- Logged all of your expenses
- Reconciled your bank accounts to at least the end of the tax year
- Used digital record keeping where possible
Starting the new tax year with clean records will make your future-self proud since the self-assessment process will become far easier and reduces the risk of missing valuable allowances.
The weeks leading up to April provide a significant planning opportunity for business owners. Making small adjustments now can lead to meaningful tax savings.
