As we approach the end of the 2024/25 tax year, UK small business owners must act decisively to optimize their tax position. Indeed, given the current economic climate, marked by persistent inflation, frozen tax thresholds, and evolving legislation, Tax Planning Strategies has become increasingly vital for financial success.
This in-depth guide explores five key year-end Tax Planning Strategies, providing actionable insights on:
- Maximising Personal and Business Allowances
- Pension Contributions for Tax Efficiency
- Optimal Profit Extraction: Salary vs. Dividends
- Capital Allowances & Full Expensing Benefits
- Loss Relief & Tax Relief Claims
By acting proactively before the tax year-end deadline, you can not only significantly reduce your tax liability but also strengthen your business’s financial foundation for future growth.
1. Maximising Personal and Business Allowances
a) Personal Tax Allowances & Frozen Thresholds
For 2024/25, key tax bands remain unchanged:
| Tax Band | Income Threshold | Tax Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic Rate | £12,571 – £50,270 | 20% |
| Higher Rate | £50,271 – £125,140 | 40% |
| Additional Rate | Over £125,140 | 45% |
Key Strategies:
- Income Deferral: If your earnings are near a threshold, consider delaying invoices or bonuses to stay in a lower tax band.
- Expense Acceleration: Bring forward deductible expenses (e.g., equipment purchases) to reduce taxable profits.
b) Dividend Allowance Reduction
Notably, the tax-free dividend allowance has now been reduced by half, falling from £1,000 in 2023/24 to just £500 for the current tax year.
Action Plan:
- Extract dividends up to £500 before 5 April 2025 to utilise this year’s Allowance.
- Beyond this, dividends are taxed at:
- 8.75% (Basic Rate)
- 33.75% (Higher Rate)
- 39.35% (Additional Rate)
c) Marriage Allowance – An Underused Benefit
Suppose one partner earns under £12,570 and the other is a basic-rate taxpayer. In that case, they can transfer £1,260 of their Allowance, saving £252 in tax.
Eligibility Check:
- The higher earner must not pay more than the introductory Rate (20%).
- Must be married or in a civil partnership.
2. Pension Contributions for Tax Efficiency
Contributing to pensions offers business owners a dual advantage: it enables tax-savvy profit extraction while simultaneously lowering corporate tax liabilities.
a) Annual Allowance & Carry Forward Rules
- Annual Pension Allowance: £60,000 (up from £40,000 in 2022/23).
- Carry Forward Rule: Unused allowances from the past three years can be utilised.
Example:
If you contributed £30,000 in each of the last three years, you could contribute £90,000 this year (£60,000 + £30,000 unused).
b) Corporation Tax Relief on Employer Contributions
Company pension contributions are tax-deductible, reducing taxable profits.
Tax Savings Example:
| Contribution | Corporation Tax Rate | Tax Saved |
|---|---|---|
| £50,000 | 25% (Profits > £250k) | £12,500 |
| £50,000 | 19% (Small Profits Rate) | £9,500 |
c) Salary Sacrifice – A Smart Alternative
Replacing part of your salary with employer pension contributions can:
- Reduce Income Tax & NICs
- Boost retirement savings tax-efficiently
Best Practice:
- Set up a formal salary sacrifice arrangement.
- Ensure compliance with auto-enrolment rules.
3. Optimal Profit Extraction: Salary vs. Dividends
a) Director’s Salary – Finding the Sweet Spot
The most tax-efficient salary for 2024/25 depends on NIC thresholds:
| Salary Level | Tax & NIC Implications |
|---|---|
| £12,570 (Personal Allowance) | No Income Tax, but NICs apply |
| £9,100 (Secondary Threshold) | No Employer NICs |
| £6,396 (Primary Threshold) | No Employee NICs |
Recommended Approach:
- Pay a salary of £9,100 (avoids NICs but retains state pension credits).
- Extract further profits via dividends (using the £500 allowance).
b) Dividend Tax vs. Salary – A Comparative Analysis
| Extraction Method | Basic Rate (20%) | Higher Rate (40%) | Additional Rate (45%) |
|---|---|---|---|
| Salary | 20% + 12% NICs | 40% + 2% NICs | 45% + 2% NICs |
| Dividends | 8.75% | 33.75% | 39.35% |
Key Insight:
- Dividends are more tax-efficient beyond the NICs threshold.
- However, dividends do not qualify for pension contributions.
4. Capital Allowances & Full Expensing Benefits
a) Full Expensing – Permanent Tax Break
Introduced in April 2023, Full Expensing allows:
- 100% first-year deduction on qualifying plant & machinery.
- 50% first-year allowance on special rate assets.
Example:
Purchasing a £50,000 commercial vehicle allows a full deduction, saving £12,500 in corporation tax (at 25%).
b) Annual Investment Allowance (AIA) – £1 Million Cap
- £1 million Allowance for most plant & machinery.
- Ideal for businesses making last-minute equipment purchases.
Pro Tip:
- Time purchases strategically to maximise deductions before year-end.
5. Loss Relief & Tax Relief Claims
a) Carry Back Loss Relief
Under current temporary measures, businesses can carry losses back three years, with a generous £2 million cap, providing valuable cash flow relief.
Example:
A £30,000 loss in 2024/25 could be offset against 2023/24 profits, generating a £7,500 tax refund (at 25%).
b) Offset Against Other Income (Sole Traders)
Notably, sole traders may offset trading losses against alternative income sources such as rental earnings, thereby lowering their overall tax liability.
Key Consideration:
- Loss relief claims must be made within four years of the tax year in question.
Final Year-End Tax Planning Checklist
- Use your £500 dividend allowance before 5 April 2025.
- Maximise pension contributions (£60,000 + carry forward).
- Claim capital allowances (Full Expensing / AIA).
- Optimise salary/dividend mix.
- Review loss relief opportunities.
Conclusion: Act Now to Secure Tax Savings
With the tax year ending soon, proactive Tax Planning Strategies can save thousands. By leveraging pension contributions, optimizing profit extraction, and utilizing loss relief, you’ll not only reduce liabilities but also retain more of your hard-earned profits.