Some year-end tax planning could save you a considerable amount of tax.
Year-end tax planning tip 1 – Sole trader and partnership year end dates
The choice of the accounting date affects the delay between earning the profits and paying the tax. If your profits are steady this delay remains the same year-on-year. If your profits are growing this can provide a useful cashflow benefit. For example, if your profits are increasing and your accounting period is set to 30 April 2012. The profits for that period will be taxed in 2012-13 and you will pay tax on 31 January 2013 and 31 July 2013, balancing payment 31 January 2014 a whole year later than if your accounting period was set to 31 March or 5 April.
If the recession has reduced your profits you may benefit from bringing your accounting period forward so the smaller profits are taxed sooner, this may also help your cashflow.
You can only change the accounting date every five years unless it is for genuine commercial reasons.
If you do not want to change your accounting date but your profits have fallen you (or your accountant) can ask for the tax payments to be based on your actual profits for your accounting period.
Year-end tax planning tip 2 – incorporation of your business
Check out our tax calculator on the calculator and toolkits page to see if you could save tax by incorporating your business; the main rate of corporation tax will be 25% from 1 April 2012 and the small companies’ rate is 20%. In addition you may have created valuable goodwill in your sole trade or partnership business such as customer lists or brand identity and this could be sold to the new company with the business
Year-end tax planning tip 3 – capital expenditure
Full tax relief (i.e. 100%) is available on capital expenditure up to £100,000 as Annual Investment Allowances. From April 2012 this is reduced to £25,000; so consider bringing forward capital expenditure.
Year-end tax planning tip 4 – more than one business?
Consider your small company the tax structure. When two or more companies are under common ownership the small company limits are shared between them. This makes it more likely that the companies will pay the “standard” corporation tax rate of 26% or the “marginal rate” that applies between the smaller and standard tax rates of 27.5%.
For example, three businesses are under shared ownership, two of the businesses have profits of £50,000 and the third has profits of £200,000. Although the total profits for all three companies is within the small company limit of £300,000 because the limit is split between the three companies the larger business will pay marginal rate tax as its profits exceed £100,000 (£300,000 divided by three).
Year-end tax planning tip 5 – extracting profits from a company
Take a salary of about £7,000 from the company, this will be sufficient to count as a contribution year for state pension but will be below the PAYE, and national insurance thresholds.
Look at benefits-in-kind:
- Some cars qualify for 100% first year tax allowances;
- Childcare vouchers can be issued (see our blog on childcare vouchers);
- A mobile or PDA can be given to employees tax and NI free.
Year-end tax planning tip 6 – pension contributions
Pension contributions from your business are subject to the £50,000 cap (see tax planning part 1)