Companies – Tax Saving Opportunities

Due to the ever-changing tax legislation and commercial factors affecting your company, it is advisable to carry out an annual review of your company’s tax position.

Year-end tax planning is a crucial opportunity to reflect on the current year’s results and carry out appropriate tax saving actions.

We outline key areas where advance planning may produce tax savings.

Corporation tax

Advancing expenditure

In situations where expenditure is planned for early in the next accounting year, the decision to bring forward this expenditure by just a few weeks may reduce the current year's tax liability.

Examples of the type of expenditure to consider bringing forward include:

• building repairs and redecorating
• advertising and marketing campaigns
• redundancy and closure costs

You should note that payments into company pension schemes are only allowable for tax purposes when they are actually made as opposed to when they are charged in the company’s accounts.

Capital allowances

When a business purchases assets such as equipment, furniture and machinery the cost of the purchase is not included in taxable profits. Instead, the business can claim tax relief through capital allowances.  

Annual Investment Allowance 

Consideration should be given to the timing of capital expenditure on which capital allowances are available to obtain the maximum tax relief.

Single companies, irrespective of size, can claim Annual Investment Allowance (AIA). AIA provides 100% tax relief on expenditure on plant and machinery (excluding cars). The maximum amount of AIA a company can claim is currently set at £1,000,000 each year.

Groups of companies have to share the allowance between the companies, so additional planning should be taken where groups are concerned. 

Writing Down Allowance 

Expenditure on qualifying plant and machinery that is not eligible for AIA, is eligible for writing down allowance (WDA). The rates of WDA are 18% or 6% depending on the type of plant and machinery being purchased. 

100% First Year Allowance 

Some assets qualify for 100% First Year Allowances, including electric and zero emission cars and good vehicles. 

Full expensing 

Full expensing covers plant and machinery applicable to the main rate of capital allowances.

50% first year allowance 

Plant and machinery applicable to the special rate of plant and machinery means companies can deduct half the cost as a capital allowance.

Trading losses

Companies incurring trading losses have three options to utilise these losses:

• set losses against total profits of the same accounting period 
• carry back losses against total profits of the previous 12 months 
• carry forward losses against future total profits

There is a restriction on the use of carry forward losses where the profits of a company or group exceed £5 million. Any profits over £5 million arising on or after 1st April 2017 can’t be reduced by more than 50% by brought forward losses. Losses arising at any time are subject to these restrictions. 

Extracting profits

Directors/shareholders may wish to consider extracting profits in the form of dividends rather than as increased salaries or bonus payments. As dividends are taxed at different rates and are not subject to National Insurance Contributions (NICs) it may be more tax-efficient. 

It is important to note that company profits extracted as a dividend remain chargeable at the relevant corporation tax rate. Our guide to directors’ pay covers more considerations when it comes to choosing how to pay yourself.

Dividends

From the company’s point of view, timing of payment is not critical, but from the individual shareholder’s perspective, timing can be an important issue. A dividend payment in excess of the dividend allowance could be delayed until after the end of the tax year (5th April), to give the shareholder an extra year to pay any tax due. The dividend allowance for 2024/25 is £500.

The deferral of tax liabilities on the shareholder will be dependent on a number of factors. Please contact an accountant for detailed advice.

Share transfers

There are good reasons why married couples and civil partners should consider equalising their income where possible and practical.

It is sensible to consider sharing income by gifting some or all of any income producing assets with your spouse to save tax. This includes properties or shares you own.

Before doing this, there are a number of legal and practical considerations which need to be taken into account. You should also be aware that for this to work, several conditions need to be satisfied. Generally, your gift must be to your spouse or civil partner from whom you have not separated and be an unconditional gift.

Professional advice should always be taken so your individual circumstances can be reviewed.

Loans to directors and shareholders

A ‘close’ company is broadly one controlled by its directors or by five or fewer shareholders. If a close company makes a loan to a shareholder, this can give rise to a tax liability for the company.

If the loan is not settled within nine months of the end of the accounting period, the company is required to make a payment, known as a 'section 455' or ‘S455’.

The ‘S455’ charge is 33.75% on the outstanding loan balance. Once the loan is repaid, the S455 charge is repayable. 

A loan to a director may also give rise to a tax liability for the director on the benefit of a loan provided at less than the market rate of interest. Our detailed guide to directors’ loan accounts will help you navigate this area.

Rates of tax

UK trading companies currently pay corporation tax at the main rate of 25% or small profits rate of 19% on their taxable profits.

For companies whose profits range between £50,000 and £250,000, they will pay tax at the main rate of 25%. This will be reduced by a marginal relief providing a gradual increase in the effective corporation tax rate.

The practical impact of this is that profits in the margin (falling between the upper and lower limits), will pay an effective rate of tax of 26.5%.

The thresholds are shared across associated companies, so company owners with more than one company should seek advice.

Corporation tax payments

Most companies must pay their tax liabilities nine months and one day after the year-end.

If your company’s profits for an accounting period are in excess of £1.5 million, you may be required to pay your corporation tax in instalments.

If you have a profit of over £20 million, there are different rules you must follow.

Corporation tax returns must be submitted within 12 months of the year-end and are required to be submitted electronically. In cases of delay or inaccuracies, interest and penalties will be charged.

Capital gains

Companies are chargeable to corporation tax on their capital gains, less allowable capital losses.

Planning of disposals

Consideration should be given to the timing of any chargeable disposals to maximise tax savings at the small profits rate rather than the full rate. This could be achieved by accelerating or delaying sales. The availability of losses, or the feasibility of rollover relief (see below) should also be considered.

Purchase of new assets

It may be possible to avoid a capital gain being charged to tax if the sale proceeds are reinvested in a replacement asset.

The replacement asset must be acquired in the four-year period beginning one year before the disposal, and only certain trading tangible assets qualify for relief.

Research and development tax credits

Research and Development (R&D) reliefs support companies that work on innovative projects in science and technology. An improvement to an existing product or process may be sufficient for a claim.

R&D relief can be lucrative and if you would like to discuss any expenditure you have made, or are planning to make, which you feel may qualify, we would be happy to review your project and check what tax savings may be available.

We would always recommend seeking professional advice, to help you determine what your company may claim.

Date published 6 Dec 2022 | Last updated 20 Sep 2024

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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