Before your company year end arrives it’s important to take the opportunity to minimise your tax bill before it’s too late. Taking a few minutes to read this guide could save you hundreds in tax.
If you’ve had a successful year and your company has made a profit, Corporation Tax will become payable. There may still however be opportunities before your year end arrives to reduce your Corporation Tax bill.
The aim of this guide is to provide you with tips, advice and checks to complete.
1. Review your company expenditure
The simple fact is that the higher your spending the lower your profit, and the less tax you need to pay. If you have any planned expenses or purchases then just before the end of your year is a great time to maximise your company’s outgoings.
Ensuring all expenses are claimed will save at least 20% in tax relief for those that are wholly, exclusively and necessarily for the purpose of business.
Here are some typical outgoings to give you some ideas:
- Expenses paid for using personal money – make sure any business expenses paid for using personal cash are recorded in the Quick Entry area and claimed back from your company. Every bit goes to saving tax so dig out any old receipts.
- Home office allowance – it’s likely that you keep on top of your company affairs at home. Don’t forget that you can claim for using your home as an office. You can read more here.
- Staff events – each year a company can pay for annual staff events up to £150 (including VAT) per guest which is allowable for Corporation Tax relief. The rules are that all members of the company must be invited and a spouse or partner can attend provided the cost for the couple does not exceed £300 (including VAT). It will be tax free provided the limit is not exceeded, if it does the whole cost is taxable, not just the excess. This is not an allowance, you must include the actual cost of the event and have receipts to support this. Find out more here.
- Stock up on office supplies – for example printer cartridges, paper, stationery or other general office supplies.
- Purchase assets for company use – including IT equipment, software and office equipment.
- Subscriptions and annual fees – it’s a great time to join a HMRC recognised professional body and make annual payments for online necessities such as domain names and hosting, file storage or project management software.
- Mobile or smart phones – businesses benefit from the connected world and a smart phone is the perfect tool. If you need and use a mobile phone for business and don’t yet have the contract in your businesses name, consider transferring it. For it to be an allowable expense the contract must be in the name of the business and paid for directly by the business. Don’t worry, a small amount of personal use is allowable.
- Other items – it’s also a good time to get any equipment repaired, updated or serviced and to ensure your insurances are up to date.
Click here to see a detailed overview of common business expenses to see if there is anything else you should be claiming.
2. Repay directors’ loans
If any of your director’s have received a loan from your company then it’s often important to repay the loan back to your company as soon as you can. If loans are not repaid you may need to pay Corporation Tax of up to 32.5% on the balance of the loan.
For more information about the tax implications of directors’s loans please take a look at this guide.
3. Review salaries and bonuses
It’s a good time to pay yourself or your partner for any legitimate work that’s been done throughout the year. For example, if your spouse helps with company admin or project management, you may be able to pay them a salary or bonus which will reduce your Corporation Tax liability.
Paying someone a salary will need them to be on the company payroll. If they’re not already an employee of you’ll need to act now if you wish to pay a salary.
A key tax advantage of running a business is the opportunity to keep national insurance costs low. Typically this is achieved by ensuring the directors salary is set to an optimum level. Remember, this is only an option if your contracts are outside IR35 so consider having it reviewed for peace of mind.
4. Check your insurance cover
It’s likely that you already have Professional Indemnity insurance to meet the contractual obligations but you could consider additional business cover to protect against the worst.
In recent years new products have become available that are compatible with small businesses of which some can offer tax relief. To read more about some of the options available, take a look at our guide on Lifestyle Protection Insurances.
5. Invest in a company pension
You’re probably aware that it’s unlikely the government will have enough money to fund everyones retirement to the standard we’d all like. You’re probably also aware that a company pension is an easy way to reduce your tax liability, as well as building up a fund for the future. Employer contributions to pensions are allowable for tax purposes so are taken from your company’s pre-tax earnings, hence they can help reduce your tax bills.
The end of your company’s year is a good time to take stock of your retirement planning and to top up your pension. If you plan to top up your pension, please ensure any payments are made and received by the pension company before your year end.
Please keep in mind that pensions are a complicated subject and you should take advice from an Independent Financial Advisor to ensure that you follow the correct rules and for advice on how much can / should be invested. As accountants, we are not authorised to provide any advice regarding pensions.
6. Extract profits as dividends
Once you’ve maximised your outgoings and updated your records in the software, you can finalise your company’s dividends for the year. You may decide to pay additional dividends if you and/or your business partner(s) don’t fall into the higher rate tax bracket.
With your records up to date in the software, your available profit is shown when you click the issue dividends button. Don’t forget to use the handy Higher Rate Tax calculator that will be displayed to review your position for the tax year to date.
7. Pay your Corporation Tax
For most businesses it’s inevitable: you’ll need to pay Corporation Tax. For small businesses (with less than £300,000 of profit) Corporation Tax currently stands at 19% of your annual profit.
You’ll need to ensure the payment is with HMRC within 9 months of your year end, but in the meantime, you may wish to transfer your Corporation Tax provisions into an interest-earning bank account. The interest you earn will go a small way towards softening the blow.
Don’t forget, if you open a new bank account, let your account manager know so they can create the new account in your bookkeeping area so you can keep your transactions up to date.