Positive action = less tax to pay
With the end of the financial year only a couple of months away, it’s time to look at how you can reduce tax liability for the 2024/25 tax year – legally and ethically.
There are tax mitigation options for both Corporation Tax and income tax, but these need to be made however before the 5th April 2025 for an individual or end of the accounting period for a company.
Corporation Tax
If you have spare cash there are two main options to reduce your Corporation Tax bill.
1: Pension contributions are tax deductible, so any pension contributions that are made into a director’s personal pension scheme before the end of the accounting period will make a difference to your next tax bill.
If you’re considering paying bonuses, it may be wise to consult with your more highly paid team members. For instance, if the bonus will take the annual salary over £100K, that person’s personal allowance starts to erode. For every additional £2 over £100K they earn, their personal allowance reduced by £1.
Some employees may prefer for their bonus to be paid into their pension instead. Pension contributions can help to restore their personal allowance and extend the basic rate band meaning more of their income is taxed at 20% instead of 40%.
This is termed ‘salary sacrificing’, Salary sacrificing an annual bonus into their pension scheme, not only reduces your overall profit figures and is tax deductible, but is also beneficial for the individual’s income tax bill.
2. If you’ve been thinking about investing in new equipment for the business, do it before the end of the accounting period to get tax relief. This might be production equipment, fixtures, fittings, plant, machinery, office equipment or furniture, IT or company cars.
The tax relief on electric vehicles also still applies. The requirement is that the vehicle must be brand new, fully electric and bought outright (not leased). If you can tick all these boxes then the company gets 100% tax relief. The vehicle also needs to be delivered to the company premises before the end of the accounting period.
However, don’t rush out and buy equipment you weren’t already planning to. There has to be a reason for purchase, beyond reducing your tax bill – or you’ll just be paying your supplier instead of HMRC – but the money will still be gone.
Income Tax
If you are an employee earning close to £100K p.a. and your employer mentions a bonus, before you start celebrating, consider asking if the additional money could be paid into your pension – it will protect your personal allowance and is tax deductible for the employer, so it’s a win-win.
What else can you do to reduce your personal tax bill?
You could subscribe to shares in companies that have EIS status (Enterprise Investment Scheme). There is a 30% tax credit, which is obtained when you prepare your self-assessment tax return, on the value of the shares subscribed. E.g. A subscription of £10,000 would receive a £3,000 tax credit
There is a higher risk scheme, SEIS (Seed EIS). These shares are in newer, smaller companies, which makes then higher risk, but the tax credit is 50% on the value of the shares subscribed for.
Our advice would be to consult with a qualified financial advisor before making any investment decisions, whether that’s shares or pension payments. They’ll help you to decide on the risk profile that you’re most comfortable with, while higher risk usually means higher returns, it also means a higher likelihood that you might lose your investment.
