There’s an old adage in the world of accounting – don’t let the tax tail wag the investment dog. In essence, we, whether as individuals or in business, shouldn’t make moves to minimise tax that might be regretted later on.
However, none of this precludes a business from doing whatever it can to lawfully become tax-efficient and two experts offer their views on what readers can do to lower their tax liabilities.
The Association of Taxation Technicians
Remuneration planning
David Wright, a technical officer at the Association of Taxation Technicians, starts with remuneration planning.
As a business grows, incorporation may be tax-efficient as there are lower rates of corporation tax compared to income tax. However, as he points out, the downside is that this introduces a second layer of taxation – corporation tax is due by the company, and then personal taxes are payable on extracting profits to the owner.
Of course, a corporate structure allows control over how much of their income the owner is taxable on, allowing them to maximise the use of their lower-rate tax bands each year. For Wright, this can be especially valuable in the event of business profits fluctuating as it allows profits to be kept within the company in good years to reduce the owner’s exposure to the top rates of income tax. By comparison, a sole trader would be liable to tax on a bumper year’s profits in full.
Wright urges care in planning how to extract profits, though. Unlike dividends, salaries are an allowable expense when calculating a company’s taxable profits, so it may appear sensible to remunerate the owner with just salary. However, National Insurance contributions (NICs) apply to salaries for both the company and the recipient. Also, dividends are not subject to NICs, and the recipient pays lower tax rates than they do on salary.
It shouldn’t be forgotten that NICs provide for future state pension entitlement along with other state benefits. For this reason, Wright suggests paying a salary equivalent to at least the secondary threshold (£9,100) to ensure a year counts for state pension contributions, but probably no more than the personal allowance (£12,570) above which PAYE starts to be incurred.
Tax-efficient perks
Benefits appeal to employees and when implemented correctly, non-cash remuneration from a company can be highly tax-efficient. Unfortunately, Wright warns that this doesn’t apply to sole traders or partnerships but does for employees they take on.
In more detail, he says that certain benefits in kind, such as employer pension contributions, providing one mobile phone per employee and free staff canteens, can be provided tax-free. Also, staff events such as an annual Christmas party or other such functions can also be laid on tax-free as long as the total cost for all events in the year does not exceed £150 per head. The costs can also be claimed against the company’s taxable profits.
Cars have for years been targeted by HMRC and as Wright points out, “electric cars can no longer be provided tax-free to employees – but until April 2025 they only attract a benefit-in-kind charge based on 2 percent of the list price”. This means, for example, a £50,000 electric car will result in a £200 annual tax charge for a basic-rate taxpayer, or £400 for a higher-rate taxpayer. Further, if the business leases the car, those costs can be claimed when calculating the business’s taxable trading profits – and says Wright, “if the business buys the car outright, the full purchase cost can be claimed in the year of purchase, as long as this is before 31 March 2025”.
If an employee gives up part of their gross salary, the employer can pay that amount into a pension scheme on the employee’s behalf, saving tax for the employee and NICs for both the employee and the employer
Salary sacrifice pension contributions are another tax-efficient option for Wright. Here he says that if an employee gives up part of their gross salary, the employer can pay that amount into a pension scheme on the employee’s behalf, saving tax for the employee and NICs for both the employee and the employer.
Finally, there’s the trivial benefits rule where rewards valued at up to £50 each can be provided tax-free to employees as long as they are not a reward for services and are not cash or cash-equivalent vouchers. Wright warns that directors are limited to £300 of trivial benefits per tax year.
The long term
Last for Wright is the exit strategy for those looking to sell up. This is because he says that a capital gains tax (CGT) charge is likely to apply, with rates of up to 20 percent on the growth in the business value. However, he says that if you structure your business so it qualifies for business asset disposal relief, you could access a 10 percent CGT rate on up to £1 million of capital gains.
And then there’s inheritance tax (IHT). As Wright outlines, a trading business can often qualify for 100 percent relief from IHT, thanks to business property relief (BPR), which can provide a huge tax saving if the business is to be passed on. But Wright warns that those who don’t structure the business carefully may miss out.
BHP LLP
Get good advisors
Kieron Batham-Tomkins, tax senior manager at BHP LLP, recognises that he is biased. However, he says that not using the right advisors that will keep you abreast of up-to-date legislation is where you can fall behind and end up paying more tax than is required.
Batham-Tomkins also recognises that it is important to remember that there is no “one size fits all” solution and that a tailored approach is particularly important, as is planning for the future as early as possible.
He’s keen to emphasise the value of a professionally qualified advisor. This is because they are obliged to undertake continuous professional development and keep up to date with the latest laws and regulations in order to maintain membership of the relevant professional body.
Of course, HMRC has the right to enquire into tax affairs regardless of whether an advisor is used or not. But as Batham-Tomkins reiterates, “You have to think that undertaking your own tax work without a qualified advisor involved puts you higher up the risk register for being enquired into.” Indeed, there is a specific question on tax returns which asks if an advisor has been used to help prepare the return; this is asked for a reason.
Separation of monies
Batham-Tomkins has a real issue with businesses not separating business and personal monies. He says that “buying something with a company credit card does not automatically make it a company expense”.
It’s natural that smaller businesses, or those in the early stages, find it hard to distinguish between what is business and what is personal, especially for sole traders that have subsequently incorporated. Even so, he says, “The best advice I can give is that, as early as possible, make sure that a separate bank account is set up and all business transactions (income and expenditure) are processed through the business bank account.” If you do have personal expenditure, where possible pay for it personally and then reclaim it from the company and keep the audit trail. In his view, this will save so much time when it comes to preparing accounts and tax returns and save the need to unpick the jigsaw of what are and aren’t personal monies.
‘Buying something with a company credit card does not automatically make it a company expense’
Plant and equipment
When it comes to investing in machinery, Batham-Tomkins’s initial response is that businesses should make purely commercial decisions: “If they were never going to buy plant and machinery, or any other asset, then it is highly unlikely that any tax relief available will make buying it worthwhile.”
That said, plant and equipment are generally more tax deductible when it comes to capital allowances, as since April 2023, a full-expensing regime has been in place. Here Batham-Tomkins explains that this means that businesses can expense the full cost – with no maximum – on the cost of brand-new plant and equipment, including commercial vehicles, which are brand new and not acquired for leasing. On top of that, he notes that even with full expensing, they can still access £1 million of annual investment allowance. This allows a 100 percent write-off of second-hand plant and machinery and also items termed integral features such as those built into the fabric of a building.
Where possible, pull the expenditure into an earlier accounting period as it is likely to speed up the tax relief being achieved
But when it comes to purchasing assets Batham-Tomkins says to think about the timing of those purchases around the year end. His advice is that where possible, pull the expenditure into an earlier accounting period as it is likely to speed up the tax relief being achieved. However, another complication that he highlights is that since April 2023, different corporation tax rates apply where some profits can effectively be taxed at up to 26.5 percent. This is why he says that timing your expenditure for relief against profits being taxed at the highest rates is also good tax planning.
Cars
Finally, on cars, Batham-Tomkins says that businesses should seek to obtain better capital allowances treatments as they cannot use either full expenses or annual investment allowance. As a result, he says that they are relieved at 100 percent, 18 percent per annum or 6 percent per annum depending on the level of CO2 emissions.
He notes that electric cars which are brand new and have 0g/km CO2 emissions can currently obtain 100 percent first-year allowances, while electric cars that aren’t brand new or cars which have emissions above 0g/km and up to 50g/km get placed in the general pool at 18 percent per annum. Anything above 50g/km are then entered into the special rate pool at 6 percent per annum.
In other words, Batham-Tomkins says to choose vehicles wisely.
Summary
Tax is an obligation on us all, but as the HMRC advert notes, it doesn’t need to be taxing. The key is good advice from a regulated professional and not following a course of action just because it’s tax-efficient.
