Introduction
The ideal time to take stock
The run up to the end of the tax year on 5 April 2025 is a good time to check that your family and business finances are arranged in the best way possible. In this Year End Tax Planning Guide, we look at useful ways to take advantage of available tax reliefs and planning opportunities. The Guide is divided into sections: planning points for companies and business owners; then points for families, couples and individuals. This is for ease of use, and there is inevitably some overlap.
Topical issues
Each year brings its own tax challenges, and this year is no exception. Key areas to think about include:
- forthcoming changes to Inheritance Tax
- changes to Business Asset Disposal Relief
- new emphasis on profit extraction strategy
- the abolition of the furnished holiday lettings rules
- impact of basis period reform for unincorporated businesses
- increased employer National Insurance costs to come
We explain these changes here, and suggest practical points for action. As your accountants, we have the insight into your affairs that can make an impact, and we look forward to being of assistance.
Note: In this publication, we use the rates and allowances for 2024/25. Throughout the text, the term spouse includes a registered civil partner.
Abolition of non-dom tax status
Fundamental changes to the tax position on UK resident non-doms and other new arrivers to the UK are to apply from 6 April 2025, which require careful planning for those affected. These specialist issues are not covered here but further information can be found in our blog 'Unpacking the Budget Part 2: Non-doms – The end of the Remittance Basis and concept of domicile for UK tax'. We also delved deeper into this topic in our webinar 'What the Autumn Budget means for you and your business'.
Planning opportunities for companies
Higher rates of Corporation Tax since 2023, combined with the operation of marginal relief, have made planning for optimal tax efficiency more complex.
Corporation Tax
The rate of Corporation Tax payable depends on the level of taxable profits in the company, plus certain dividends received by the company.
| Taxable profits | Corporation Tax rate |
|---|---|
| £0 to £50,000 | 19% small profits rate |
| £50,001 to £250,000 | 25% less marginal relief |
| Over £250,000 | 25% main rate |
The Corporation Tax rate is applied to the company's taxable total profits. A company with profits of £400,000 would therefore have a Corporation Tax liability of £100,000 (25% of £400,000).
Companies with profits between £50,000 and £250,000 pay at the main rate reduced by marginal relief. This creates a gradual increase in the Corporation Tax rate, resulting in an effective tax rate of 26.5% for profits between £50,000 and £250,000.
Group structure is important as the limits are shared where there are associated companies.
Action point: Maximise deductions
The impact of marginal relief means maximising deductions is particularly important for companies where profits fall between these thresholds. We can help you identify relevant claims for deductions for your business.
Claim for capital allowances
Making sure capital allowances claims are maximised is a key way to do this.
The Annual Investment Allowance (AIA) now stands at £1 million. Along with general Writing Down Allowances, this will provide relief sufficient for many companies. In addition, however, companies investing in qualifying new plant and machinery can claim:
- Full expensing, providing first year allowances (FYAs) of 100% on most new plant and machinery investment which would ordinarily qualify for 18% Writing Down Allowances
- a FYA of 50% on most new plant and machinery investment which would ordinarily qualify for 6% special rate Writing Down Allowances
These additional reliefs will come into their own where companies or groups make major investment. The disadvantage is that where the FYAs have been claimed, a balancing charge based on proceeds may arise on disposal. You may therefore wish to consider timing capital acquisitions to make maximum use of the AIA instead.
There is also a capital allowance, the Structures and Buildings Allowance, available on some new commercial structures and buildings, which will be relevant to some businesses. We can advise further here.
Research and Development claims
Generous tax relief exists for companies engaged in qualifying Research and Development (R&D) activities. Broadly, the definition of R&D is work on innovative projects in science and technology that aim to seek an advance in a particular area, resolving scientific or technological uncertainty.
New rules
The rules on R&D tax relief changed in 2024. In overview, for accounting periods starting on or after 1 April 2024, there is a taxable 20% above the line credit. Loss making SMEs, where R&D expenditure accounts for 30% or more of total expenditure, have the option of claiming Enhanced R&D intensive support. This provides additional relief, and the option of surrendering losses for a repayable tax credit.
Advice is key
R&D is a complex area, where trusted professional advice is essential. Though error and fraud in claims for R&D tax relief are very much in the government's spotlight, the benefit that can accrue from a genuine claim is considerable.
Note that companies are sometimes approached by commercial agents offering to submit speculative R&D claims on their behalf in return for high commission, and great caution is recommended in any such case. Even sectors highly unlikely to be carrying out R&D, such as care homes, childcare providers and personal trainers can be on the receiving end of this sort of contact.
We work with external specialists to help you assess whether your company is carrying out activities that might qualify under the R&D rules. Do please contact us for further information.
Loss claims
A claim for loss relief, whether a trading or property loss, or loss on the sale or disposal of a capital asset, can be used to reduce the overall tax liability; in some cases, to generate a refund; and will also assist with cash flow.
Generally, a loss may be set off against other profits of the same accounting period, and then carried back to the previous 12 months. There is also scope to carry losses forward, subject to certain conditions. Decisions on loss relief claims can influence the timing of cash flow and the overall level of tax relief. We can help you determine the best way to utilise any losses made.
Action point: Watch two-year time limits
Broadly, loss claims must be made within a particular window, and clearly making a claim as soon as possible will help with cash flow. To set a loss against profits of the current or an earlier accounting period, the claim must usually be made within two years of the end of the accounting period in which the loss was made.
Managing new employer National Insurance rules
Autumn Budget 2024 announced sweeping changes to the National Insurance regime for employers from 6 April 2025.
Contributions start at lower level
Employers will start making secondary National Insurance contributions (NICs) at a lower level of earnings:
- the secondary threshold becomes £5,000 per year, rather than £9,100 per year
- from 5 April 2028, it will then rise in line with the Consumer Price Index
Rate of contribution rises
The rate of secondary Class 1 NICs paid by employers will rise from 13.8% to 15%.
The increase impacts Class 1A contributions payable on benefits in kind, and Class 1B NICs payable on PAYE Settlement Agreements, which also rise to 15%.
Increase in the Employment Allowance
- The Employment Allowance (EA) rises from £5,000 per year to £10,500 from 6 April 2025
- Eligible employers can offset the EA against their NICs liability, potentially reducing it to nil
- It will no longer be necessary to have had an employer secondary Class 1 NICs liability of £100,000 or less in the previous tax year to claim
- The EA is not available to single director companies where the director is the only employee paid above the secondary threshold
The new rates and thresholds potentially represent a significant increase in costs for employers, especially when taken alongside the new minimum wage rates in force from April 2025.
Action point: Use salary sacrifice to manage costs
In most cases, the tax advantage of salary sacrifice arrangements has been removed in recent years. However, with pension contributions and certain other benefits, advantages remain. As employer NICs bills rise, remuneration packages that manage NICs costs by using salary sacrifice become very attractive options. We can help you assess your remuneration strategies.
Profit extraction planning points
Recent tax changes continue to make profit extraction strategy for director-shareholders in family companies a complex matter.
Gone are the days when advice could be neatly summarised as 'low salary, take the rest as dividends'. Bespoke planning has never been more important.
Adapt extraction strategy for National Insurance changes
A major new element for planning is the changed outlook for employer National Insurance contributions (NICs) from 6 April 2025. This is covered elsewhere in the Guide.
Whilst the changes do not impact directorshareholders in their capacity as employees, they certainly do in their capacity as owner-employers. The overall impact will depend on specific circumstances, and we can help you to ascertain how these changes will affect your business.
Note in passing that though employer NICs continue to be due, employees don't pay NICs when they reach State Pension age. This may help inform thinking on extraction strategy for senior family members.
Paying a salary
From the company's perspective, salary and employer NICs are generally deductible business expenses for Corporation Tax purposes. Traditionally, many family companies have set salary at a level preserving State Pension entitlement but minimising the level of NICs due. In many cases, a salary covering the standard Personal Allowance was appropriate.
However, the new, lower threshold for employer NICs, the widening gap between employer and employee NICs, and changes to the EA, mean that the decision will now need greater attention. A wide range of issues, including the level of any other income, personal circumstances of each director, company performance, activities and group structure will all need to be taken into account. We should be pleased to help you determine an appropriate figure for salary to suit your circumstances.
Extraction through dividends
The Dividend Allowance is now £500 for 2024/25 and the foreseeable future. The rate of tax on dividend income has become higher in recent years, and altogether, profit extraction through dividend payment has become much more expensive. It may still be tax efficient to take profits as dividends in some circumstances, but the decision is becoming finely balanced.
Key considerations
- Dividends do not incur NICs, meaning a potential for saving for the director-shareholder as employee, and the company as employer. In addition, dividends are still subject to lower overall Income Tax rates than non-savings income. However, as dividends are paid out of retained (post-tax) profits, it is also important to factor this into calculations, especially with current higher Corporation Tax rates
- Dividend payments do not qualify as relevant earnings for personal pension payments
- Scottish taxpayers will want to remember that dividends are taxed at UK rates, and balance this against the fact that bonuses are taxed at Scottish rates as employment income
Please talk to us to decide on the best options for you.
Extraction via bonus
A bonus is subject to Income Tax and NICs for the director-shareholder, and employer NICs for the company. It is however a deductible expense for Corporation Tax purposes, and so can be used to reduce taxable profits or generate a loss.
Depending on your circumstances, it may be more efficient to extract profits as a bonus, for example where there are not sufficient retained profits out of which to pay a dividend at the required level, perhaps where an overdrawn director's loan account needs to be cleared (see elsewhere in this Guide).
Use timing of bonus to advantage
The timing of any bonus determines when it is chargeable to tax for the director-shareholder. It may be possible to defer taxation to a later tax year, or include in the current tax year, depending on how and when the bonus is declared. It is important to get timing and procedure correct, and we can advise further here.
As regards Corporation Tax, it may be possible to retain a deduction for the company in the current accounting period, so long as the bonus is paid within nine months of the company year end.
Profit extraction through pension contributions
Pensions provide significant planning opportunities. Extracting profit by means of employer contributions to a personal pension for a director comes with a double advantage: the company, as employer, gets tax relief and saves on NICs; and the director-shareholder, as employee, gets a benefit free of tax and NICs. If a spouse, or perhaps adult children, are also employed in the business, the company could make reasonable contributions on their behalf.
Note that employer contributions must meet the 'wholly and exclusively for the purposes of the trade' test. The overall remuneration package must also be commercially justifiable, whether the contributions are for director-shareholders or family members employed. Do also bear in mind that employer contributions are taken into account for the individual's annual allowance.
The forthcoming increase in employer NICs costs makes profit extraction by means of employer pension contributions, which do not attract NICs, additionally advantageous. Please talk to us for specific advice.
Dealing with directors' loan accounts
What are directors' loan accounts?
It is common for director-shareholders in family companies to have a loan account with the company. They can take a variety of forms; sometimes specific amounts borrowed outright as a short-term loan, but often informal transactions, such as cash withdrawals to meet personal expenditure, or personal expenses paid directly by the company.
Where, overall, a director has borrowed more from the company than they have lent to it, the director's loan account is said to be overdrawn. Such balances are usually cleared a few months after the year end, when profits have been determined, often by voting a dividend or paying a bonus.
Corporation Tax implications
As most family companies are what are technically called 'close' companies, they are within scope of the loans to participators rules. The rules mean that a charge to Corporation Tax, often known as a s455 charge, arises if the loan is unpaid nine months and one day after the end of the accounting period. For loans made on or after 6 April 2022, the charge is 33.75%. The charge is temporary, in that when the loan is paid or written off by the company, the s455 tax is repaid. This, however, only takes place nine months and one day after the end of the accounting period in which the loan is repaid.
Planning for the charge
There is no charge if the director-shareholder repays the loan balance within nine months and one day of the end of the accounting period. Options to clear the loan account and avoid the s455 charge crystallising include paying dividends or a bonus; repayment in cash; or writing off the loan. Alternatively, the loan could be left outstanding. Please do talk to us about the best course of action for you.
Quite apart from the issue of the s455 charge, a loan to a director-shareholder may stand to be treated as a taxable employment benefit. Overall, it is a complex area, and we would be pleased to advise further.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
