Business Matters – Issue 34

Three key changes for business owners |  Time for a shake up?  |  Personal allowances you shouldnt miss  |  Spotlight on ISAs  |  Break the habit

Staying on track

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Tax year-end: Take the deadline in your stride

Financial planning is a marathon, not a sprint – but the end of the tax year can be a helpful short-term goal to aim towards. Seize the moment and take the time to reassess your tax affairs to ensure you’re making the most of your allowances.

 

Tax year-end is a valuable opportunity to leverage available tax reliefs, allowances and incentives – but it can bring its own unique challenges for small-business owners. Understanding what your company needs to do at this crucial time can help you comfortably sail over the finish line, arriving well-prepared for the next tax year.

Taking a strategic approach can result in significant cost savings and improved cash flow, which is especially important if you’re considering making significant changes to your business in the short term. And, on a personal level, while many of us are still being careful with our budgets, the last thing you want to do is pay any more tax than you have to on anything you save or earn.

Below are the three key things business owners need to think about. You can also download your tax year-end checklist for personal finances here:

Three key changes for business owners

  1. Corporation Tax

One of the biggest changes for many incorporated businesses in the next few years is an increase in the rate of Corporation Tax. From April 2023, the rate increased from 19% to 25% on profits of more than £250,000. Companies with profits below £50,000 will pay 19%, while those with profits between £50,000 and £250,000 will pay a tapered rate up to the full 25%.

Getting your company pension contributions in shape

Did you know that company pension contributions can help minimise your Corporation Tax liability? Employer contributions are taken from your business’s pre-tax earnings, so they can be a tax-efficient way to extract value from the company. Remember that company pension contributions are relieved in accordance with the accounting year in which they are paid – not the tax year.

  1. Dividends

If you own a business and take dividend income instead of a salary, it’s important to remember that the government is changing the rules on Dividend Tax in 2024/25. Dividend Tax is charged on anything you earn from company shares, including dividends from money held in collective investments such as funds and investment trusts. Your current Dividend Tax allowance is £1,000, so some of the money you earn from company dividends is tax-free. But from 5th April 2024, that allowance will halve to £500. If you’re a higher-rate taxpayer, you’ll pay 33.75% Dividend Tax, and it’s 39.35% for additional-rate taxpayers.

  1. Don’t forget the delay in making tax digital

Many entrepreneurs will be breathing a sigh of relief that the MTD ITSA – the latest stage of the government’s plan to digitalise the tax system – has been delayed to April 2026. This stage will affect certain sole traders and landlords – and will mean you have to digitalise books and records and report them quarterly to HMRC, with a final end-of-year submission.

Although the delay will be welcome news, if you get into the habit of keeping your paperwork up to date now, you’ll make life much easier come the time to transition to MTD ITSA. You can use the HMRC app to organise your paperwork – it’s a useful resource for getting your papers in order and finding the correct tax codes and other official information.

The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.

Time for a shake-up?

As we navigate another challenging year, businesses need robust, agile long-term plans to help them thrive. So, could this be the right time to revise your three-year plan?

It’s possible to make short-term changes to address some of the challenges facing your business, such as higher interest rates and wages. But if these actions are not part of a formal, documented long-term plan, they could lead to unintended consequences.

There are various aspects that SME owners could review to improve their financial resilience, including:

Some of the most common changes among SMEs currently include:

  • Reviewing capital structures
  • Analysing costs
  • Driving operational efficiencies
  • Looking for growth opportunities

What’s more, it’s important to be clear about what’s important to you and your business – know what your goals are and why you want to achieve them. A bit like reaching milestones during a run, each step brings you closer to financial success.

Personal allowances you shouldn’t miss

As well as ensuring your business taxes are in good form before 5th April, it’s important to ensure your personal investment strategy is still working hard for you. To help you stay on top of your finances this spring, we’ve created a tax year-end checklist:

It’s always a good idea to take advantage of your annual tax reliefs and allowances wherever you can. While the Spring Budget is unlikely to rock the boat ahead of the upcoming election, your tax allowances are almost always a case of ‘use it or lose it’, so it’s worth acting before 5th April.

Making tax-smart decisions in good time can make a real difference to the pension pot you have when you retire. What’s more, saving for retirement is also an exceptionally tax-efficient way to draw profits from your business.

Beat the 60% tax trap

For earners of £100,000 or more, the rate of Income Tax you pay will be affected by the gradual removal of the £12,570 personal allowance. It’s currently tapered away at a rate of £1 for every £2 you earn above £100,000.

In real terms, this means that for every £100 of income between £100,000 and £125,140, you only get to take £40 home. £40 is deducted in Income Tax, while another £20 is lost by the tapering of the personal allowance. This amounts to a 60% tax rate – often referred to as the ‘60% tax trap’. So what can you do to sidestep or mitigate this trap, ahead of 5th April? Read more here.

Spotlight on ISAs

Amid persisting economic challenges, it’s important to make the most of all your tax allowances to ensure your investments are working as hard as possible – much like navigating different terrains during a run. One way to do this is by reviewing your mix of Cash and Stocks & Shares ISAs ahead of tax year-end.

At the time of writing, inflation appears to be coming under control, although interest rates remain higher than average. However, once interest rates begin to fall, your savings or investments will slowly lose value in real terms over time if inflation outpaces the average interest rates or investment returns.

So, if you’re holding a lot of money in Cash ISAs or cash accounts, you may miss out on growth that could go a long way to help you achieve the lifestyle you imagine in years to come. Many people find that financial well-being and security comes down to a combination of both Cash and Stocks & Shares ISAs.

So, before the end of this tax year, it’s worth having a chat with us about your own personal ISA mix to see whether Stocks & Shares ISAs should be playing a bigger role in your personal financial future.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise.  You may get back less than the amount invested.

Stocks and Shares ISA does not provide the security of capital associated with a Cash ISA or a deposit account with a bank or building society.  SJP do not offer a Cash ISA.

The favourable tax treatment given to ISAs may not be maintained in the future as they are subject to changes in legislation.

Break the habit

With so many moving parts, not to mention the pressures of running your business, having to make tax-smart, informed decisions can be daunting.

At the end of every tax year, there’s a flurry of activity as people scramble to make the most of their tax reliefs and allowances. But you shouldn’t just have your eye on 5th April when you’re thinking about tax planning – it should be carried out all year round.

As we mentioned at the beginning of the newsletter, financial planning is a marathon, not a sprint – and by pacing yourself for the long haul, you can make consistent and sustainable decisions to achieve financial ‘fitness’ over time.

That said, the upcoming deadline is still a helpful prompt to make sure you’re making tax-smart decisions.

Staying on track

If there’s one way of making sure you’re maximising your tax allowances, it’s by consulting a professional financial adviser. At Wellesley, we can help you optimise any money coming into your business and make decisions for the future of your business – as well as incorporating your tax situation into a broader, long-term financial plan.

For example, some tax allowances are not necessarily straightforward, as there can be small but potentially crucial nuances in the rules because they relate to different business types. Yet with the right advice, it’s possible to maximise tax efficiency while continuing to focus on the everyday running of your business.

Returning to the running metaphor, a financial adviser is much like your personal trainer – we’re experts in our field, can help you create a personalised plan and will regularly review it (and tweak it if need be) to keep you on track. Like having a GPS during a run, an adviser helps you stay on course and navigate through the twists and turns of your financial journey. Just as running builds endurance over time, making the most of your pension allowance and saving steadily increases wealth through the accumulation of interest and returns.

Together, we’ll ensure your business stays on the path to success!

SJP Approved 13/03/2024