Business tax planning strategies for your limited company

We often help our clients with business planning strategies and techniques that reduce their tax liabilities and increase their profit margins.

However, taxes, regulations, reliefs, and allowances are constantly changing so it’s important to consistently reconsider your current practices and strategies.

In recent months and years, the Government has made some significant amendments to the way businesses pay taxes.

Here are some of the things that we think you should now be aware of when it comes to business strategies and tax planning.

Your current tax obligations

We know that you already have a firm grasp of the relevant taxes, like Corporation Tax, Value Added Tax (VAT), Business Rates, and National Insurance Contributions.

However, each tax has its own set of rules and rates, which can impact different businesses in various ways – especially in light of more recent changes.

A qualified accountant can walk you through your various tax liabilities and explain each one in turn but here’s a quick rundown:

  • Corporation Tax: A tax on the profits of limited companies. This is currently set at 25 per cent for businesses that make more than £250,000 in profit or 19 per cent for businesses that make £50,000 or less. The main rate (25%) also applies to single companies with profits between £50,000 and £250,000, but marginal relief will be given.
  • Value Added Tax (VAT): A consumption tax levied on the value added to goods and services, applicable to most goods and services sold for domestic consumption. The VAT registration threshold is £85,000 (soon to be £90,000 as announced in the Spring Budget) of taxable turnover in a 12-month period. The standard rate of VAT is 20 per cent but there are some goods and services that are subject to a reduce rate of 5 per cent or 0 per cent and some are exempt.
  • National Insurance Contributions: Payments made by employees and employers into the National Insurance scheme, which funds state benefits like the State Pension and the NHS.

Strategic use of reliefs and allowances

Utilising available tax reliefs and allowances can significantly reduce your tax bills and expenses.

Below are some detailed explanations of key reliefs and how they can benefit your business:

Full expensing

Full expensing enables companies only to deduct 100 per cent cost for expenditure on plant and machinery that would otherwise be included in the main rate pool.

Companies can also deduct 50 per cent for plant and machinery that would otherwise be included in the special rate pool.

The asset must be new and unused, and the expenditure must be incurred between 1 April 2023 and 31 March 2026.

Annual Investment Allowance (AIA)

The Annual Investment Allowance enables businesses to deduct the full cost of qualifying capital expenditure from their profits before tax.

The current limit stands at £1 million allowing significant investments in plant and machinery to be written off against taxable profits in the year of purchase. (There are restrictions on the £1 million limit and can be reduced depending on associated companies).

This form of relief applies to most plant and machinery investments, except for cars, items previously used for other purposes before being brought into the business, and items received as gifts​​​​.

It’s designed to encourage business investment in tangible assets by providing an immediate reduction in taxable income, effectively accelerating the tax relief that would otherwise be spread over several years.

Capital allowances

Capital allowances permit businesses to write off the cost of certain capital assets against taxable income, thereby reducing their tax bill.

This category includes enhanced capital allowances for investments in energy-efficient or environmentally beneficial equipment, providing 100 per cent relief in the first year.

Such allowances cover a wide range of assets, including machinery, equipment, and vehicles, encouraging businesses to invest in sustainable practices.

Research and Development (R&D) tax credits

R&D tax credits are designed to support companies that invest in innovation within qualifying projects.

Following recent reforms, the Government has merged the R&D Expenditure Credit (RDEC) and the R&D SME scheme into a single, streamlined approach.

This consolidation aims to simplify the claims process, though the specific benefits now vary depending on the company’s size and profitability, with relief rates adjusted to provide targeted support for innovative activities.

Rates vary from 18.6 per cent and 27 per cent.

Employment Allowance

The Employment Allowance allows eligible employers to reduce their annual National Insurance liability by up to £5, long as the employers’ national insurance liabilities is less than £100,000 in the previous tax year.

This relief is applied each payroll run until the £5,000 limit is reached or the tax year concludes.

It’s specifically aimed at reducing the cost of Class 1 National Insurance contributions for employers, making it cheaper to hire and retain staff.

VAT reliefs

VAT reliefs, such as the Flat Rate Scheme, are designed to simplify VAT calculations for small businesses.

By applying a fixed rate of VAT to their turnover, companies can streamline their VAT payments, reducing administrative burdens.

Eligible businesses with a turnover of up to £150,000 can benefit from this scheme, keeping the difference between what they charge customers and what they pay to HMRC.

The flat rate percentage varies by industry sector, offering a tailored approach to VAT for small businesses.

Effective use of losses

Businesses should understand how to use their losses effectively, as well as their profits.

Many don’t realise that losses can often be carried back to previous years to reclaim tax paid or carried forward to offset future profits.

This can be a crucial cash flow management tool, especially for start-ups and businesses experiencing temporary downturns.

Utilising your losses can be complicated, however, and non-compliance is often looked upon unfavourably by HM Revenue & Customs (HMRC). As such, it is always best to speak to your accountant for tailored advice on leveraging losses.

For further information, or help to mitigate your tax liabilities, please don’t hesitate to contact us today.

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