Understanding Annual Accounts for Limited Companies in the UK
How would you structure your personal and company affairs can have a massive impact on the tax your business pays. We’ll come up with a tax planning strategy for your business that makes sure you retain more profit from your business. We can conduct a full tax review of your business and determine the most efficient tax structure for you. Very often such reviews result in considerable tax savings, which show up as real improvements in your bottom line.
2023/2024 Tax Planning Considerations for Business Owners
Wingate Accountants provides expert advice on the tax changes and planning considerations for businesses in the 2023/2024 financial year.
Our partners, Parry Jackson and Lewis Ratcliffe, analyse the key factors that business owners and managers need to consider to effectively manage their tax positions this fiscal year.
Key Tax Rate Changes in 2023
Several important tax rate changes will impact businesses in 2023, and it is crucial to plan accordingly.
Income Tax Changes
- Basic Rate: The basic rate of income tax remains unchanged at 20% in April 2023, despite previous proposals for a reduction.
- Higher and Additional Rate Thresholds: The higher rate tax threshold will be reduced from £150,000 to £125,140. For the additional rate, income tax will apply on earnings above £125,140 rather than £150,000, meaning that more taxpayers will now fall into the higher tax brackets. The number of individuals affected by this change is estimated to increase by 232,000.
Capital Allowances and Full Expensing
- Full Expensing replaces the super-deduction scheme that was scheduled to end in March 2023. Under this new regime, businesses can claim 100% capital allowances on qualifying expenditures, such as plant and machinery, up until March 2026. While this isn’t as generous as the super-deduction, it will still encourage significant business investment in the future.
R&D Tax Relief
From April 2023, an increased rate of 27% for Research and Development (R&D) relief will allow businesses to claim higher repayments on qualifying R&D expenditure, up from the previous rate of 18.6%. This change provides a significant incentive for businesses engaged in innovative activities
Dividend Taxation
From April 2023, the nil-rate band for dividend income will reduce from £2,000 to £1,000, with further reductions to £500 from April 2024. This will affect approximately 3.2 million people.
In addition, the dividend tax rate was increased in April 2022 by 1.25%, leading to higher tax rates on dividends:
- Basic rate: 8.75%
- Higher rate: 33.75%
- Additional rate: 39.35%
- This has made traditional dividend extraction strategies for owner-managed businesses more expensive, prompting a need for careful tax planning regarding how business owners extract funds
Corporation Tax
Corporation tax rates will rise for businesses with profits exceeding £50,000:
- 25% for businesses with profits over £250,000.
- A marginal rate of 26.5% applies for profits between £50,000 and £250,000.
- Business owners should be proactive in reviewing their business structure and tax planning strategies to mitigate the impact of this increase in tax rates.
Should You Review Your Business Structure?
It’s essential for business owners to periodically assess whether their business structure aligns with their current and future goals, especially in light of tax changes.
Considerations for Business Structure:
- Sole Trader vs. Limited Company:
- While a limited company offers opportunities for lower taxes, the difference in rates is narrowing due to recent changes. It’s more important than ever to consider your personal circumstances before making any decisions.
- A sole trader or partnership structure may offer more flexibility but will result in taxation of all profits at the owner’s personal tax rates.
- A limited company provides flexibility in how you extract funds—whether through salary, dividends, or pension contributions.
- Exit Planning:
- If you’re considering exiting your business, you may still be eligible for Business Asset Disposal Relief (BADR), formerly known as Entrepreneur’s Relief (ER). This relief allows business owners to pay 10% tax on profits from selling or winding down the business, up to a lifetime limit of £1 million.
- Whether you plan to sell the business or liquidate it, advance planning is critical to maximize the tax advantages.
- Sole Trader vs. Limited Company:
Optimizing Your Remuneration Strategy
Choosing the right method to extract funds from your business is key to minimizing taxes while ensuring you meet your financial needs.
Options for Remuneration
If operating as a limited company, you have multiple options to extract funds
- Salary: Provides a fixed income subject to income tax and national insurance
- Dividends: Can be more tax-efficient, but subject to changes in the dividend tax rates.
- Pension Contributions: Contributions made to pensions can reduce your taxable income and provide long-term retirement benefits. However, there are limits on pension contributions and associated tax reliefs that should be carefully considered
- Bank statements, loan agreements, and more
Business Remuneration Planning
Determine how much you need or wish to take from the business. Ensure this amount is sustainable based on business performance, profitability, and tax efficiency.
Use pension contributions to manage taxable income, especially when income falls into higher tax bands. Consider making employer pension contributions to reduce corporation tax, particularly if you are a director of your company.
How to Comply with Making Tax Digital (MTD)
The Making Tax Digital (MTD) initiative is one of the UK Government’s ongoing efforts to streamline tax reporting, and businesses must stay compliant.
MTD for VAT:
- For all VAT-registered businesses, MTD for VAT has been a legal requirement for over a year. Businesses should ensure they have integrated digital systems in place to report their VAT liabilities to HMRC.
MTD for Income Tax Self-Assessment (ITSA):
- The rollout of MTD for ITSA has been delayed until 2026. It will be phased in stages, starting with businesses and landlords with turnovers exceeding £50,000 in 2026, and those with turnovers exceeding £30,000 in 2027.
- Although the mandatory compliance date is a few years away, businesses should begin preparing their systems and processes for the change now to avoid last-minute challenges.
Tax Implications for Unincorporated Businesses
If you operate as a sole trader or partnership, you need to be aware of the upcoming changes to the basis period for taxation, effective from 2024/25.
Basis Period Reform:
- Basis period reform changes how sole traders and partnerships will calculate their profits for tax purposes, aligning them with the tax year.
- For businesses with year-ends other than 31 March or 5 April, this reform will have a significant impact.
- The transitional year (2023/24) may result in additional taxable profits, but the government will allow the impact to be spread over five years to smooth out the tax effect.
Business owners should assess how the transition will affect their cash flow and tax position, particularly if they anticipate higher profits in the transitional year.
Pension Contributions and Managing Tax Liabilities
Pension contributions are a highly effective tool for reducing taxable income, especially if you are in a higher tax bracket. Here’s how:
- High Earners: If your income falls between £100,000 and £125,140, you may lose your personal allowance due to the tapered allowance. Pension contributions can restore this allowance and lower your effective tax rate.
- Contributions can also offset High Income Child Benefit Charge or be used as corporate tax relief if paid by your company.
Final Thoughts: Effective Tax Planning for 2023/2024
With the upcoming tax changes, business owners need to consider how to structure their businesses, optimize remuneration, and plan for tax reliefs. Taking proactive steps now can result in long-term savings and help you achieve your financial goals.
For advice and guidance tailored to your business, contact Wingate Accountants today. Our team, led by Parry Jackson and Lewis Ratcliffe, is here to help you navigate the complexities of tax planning and ensure your business is positioned for success.
