Business Tax Review 2024-25

THE BASICS:

Whether you are self-employed or have your own company your periodic business tax payments will always be based on yearly trading profits and other chargeable gains made in the same period.

If you run your business through a company, corporation tax is payable on adjusted business profits (after allowances for capital purchases), nine months and one day after your year-end date. Accordingly, corporation tax for the accounting year to 31 March 2023, will be due for payment 1 January 2024.

As a quick fix, you could transfer between 20% and 25% of your monthly profits to a deposit account to reserve for this liability.

If you are self-employed, your business profits will form part of your self-assessment tax return. The amount of tax you will pay is split into two instalments on account, and a balancing adjustment if necessary.

To reserve cash for your self-assessment tax payments, the mathematics are more complex. Your best option is to deduct £1,000 per month (being your approximate income tax personal allowance) for each business partner, from the trading profits you make, and apply 20% to what is left. Transfer this amount to a deposit account. However, this will only provide the funds to pay tax on your business profits at the basic rate. If you have other taxable income and your total income is more than £50,270 the

potential higher rate tax will need to be factored in.

PRE-YEAR-END TAX PLANNING:

If you have a good set of management accounts, for say the first three quarters of your trading year, and a realistic projection for the year, then you can sit back with your trusted tax advisor and consider your options.

Whatever your business structure tax due on business profits needs to be paid at some future date. Pre-year-end tax planning gives you adequate time to estimate your future liabilities and reserve funds to pay the bill…

VAT: ARE YOU USING THE BEST SCHEME?

Both self-employed business owners and companies should consider their options if registered for VAT. If you presently use the standard scheme, you may be advised to look at the VAT special schemes. These include:

  • Cash Accounting,
  • the Flat Rate Scheme, and
  • Annual Accounting.

There are turnover limits that will exclude larger organisations benefitting, but smaller businesses may be able to secure cash flow benefits and a possible reduction in their overall VAT payments. Worth checking this out.

The check lists that follow have been split into two: the first for self-employed business owners (sole traders or partners), and the second for limited companies and their directors. The suggestions will impact income tax, NIC and corporation tax payments.

Self-Employed Tax Review Check List 2024-25

  • The income tax you will pay for 2024-25 will based on your profit or share of profits for the trading year ending in the 2024-25 tax year. However, you will have made two payments on account for 2024-25 (January and July 2024) based on your profits for the preceding year. Accordingly, if your profits are increasing you will likely have underpaid tax for 2024-25 and any balance owing will be payable 31 January 2025. If your profits are decreasing, you can elect to make smaller payment on account. Either way, having your estimated trading figures available, to forecast your tax payments, means you have ample time to request reductions in payments on account or save to meet any balance due January 2025.
  • Every self-employed person is entitled to earn £12,570 during 2024-25 without paying income tax. If your projected profits (or share of profits), assessable in 2024-25, are lower than this amount your personal tax allowance (or part of the allowance) may be wasted. To avoid this, you can defer claims for capital allowances, or perhaps defer refurbishment or other non-recurring costs to increase your taxable profits, and fully utilize your personal tax allowance. These adjustments will tend to push tax relief on deferred expenditure into future years.
  • If your share of profits looks as if it will breach one of the thresholds and push you into higher, marginal rates of tax (for example: loss of child benefit if income exceeds £50,000, loss of your personal allowance if your income exceeds £100,000, or a 75% reduction in the amount of pension relief you can claim if your income exceeds the relevant threshold). To counter these risks, you could consider bringing forward capital investments, in plant, equipment or commercial vehicles and claim additional capital allowances.
  • Self-employed farmers, who can experience significant variations in the level of profits achieved, should take advantage of the extended averaging rules that entitle them to average their profits over a five-year or two-year period for 2024-25.
  • In planning for tax payments, based on profits assessable for 2024-25, business owners should be aware that generous tax allowances are still available for qualifying capital expenditure. The Annual Investment Allowance allows you to claim a 100% write off for expenditure up to a £1m limit. This is a useful adjustment device to reduce taxable profits and save tax, whilst maintaining published profits in your profit statement. If your business is incorporated, you can take advantage of the Full-Expensing of qualifying capital purchases. This means that ALL capital expenditure can be written off for tax purposes, no limits.
  • Class 4 National Insurance is based on the level of business profits: 8% on profits between £12,570 and £50,270, and 2% on profits over £50,270. Any reductions you can achieve in your taxable business income will also reduce this significant NIC charge.
  • Since 2016 the rules for the VAT Flat Rate Scheme changed. All users of this scheme should crunch the numbers to see if they qualify as a limited cost trader. If they do, a flat rate of 16.5% must be applied and this may preclude the advantages of registering for the scheme.
  • Finally, readers should take a look at our check list for individuals’ subject to income tax, as all of the comments made will help self-employed persons reduce their tax liabilities.

And do not forget, you pay tax on the profits you make, not the drawings you take from your business!