Pre year-end considerations

What should you consider ahead of your year-end?

Many Limited companies have 31 March year-ends, and where possible we like to have a ‘pre year-end’ meeting with our clients to both have a general catch-up with them and also to discuss any potential tax saving matters. This article details key considerations and points of discussion. 

Below are various matters we would often discuss with our clients and are important to consider.

Directors Pensions

A company can contribute to a director’s pension scheme to reduce the profit and corresponding Corporation Tax liability.

The current annual pension allowance for an individual is £60,000 and if prior year allowances have not been fully utilised, there may be scope to pay additional amounts.  As with all pension decisions, we always recommend speaking to a financial advisor.

The payment would need to have cleared the company’s bank account by the year end date for it to be eligible for relief.

Trivial Benefits

Trivial benefits are a way of giving small gifts to employees that are not subject to tax & NIC.

As an example, they are described as ‘trivial’ because they should have little actual monetary value. They’re usually small token gifts, like a box of chocolates or alcohol, perhaps to celebrate a birthday or anniversary.

You don’t have to pay tax for your employee if all of the following apply:

• it cost the company £50 (inc. VAT) or less to provide.
• it isn’t cash or a cash voucher (gift cards qualify as long as they are not exchangeable for cash)
• it isn’t a reward for their work or performance.
• it isn’t in the terms of their contract.

If the cost is over £50, the whole amount is taxable, not just the excess over £50.

There is no annual limit (unless they are a director and this is £300).

Capital Expenditure

If a business is considering some capital expenditure in the near future, such as new computer equipment or a piece of machinery, it may be worth considering making this decision before the year end to reduce the chargeable profits (as the asset would attract capital allowances).  Even if an asset is financed via Hire Purchase, such as a commercial vehicle, it would still be eligible for the full write down for tax if the invoice is dated before the year end.

Qualifying plant and machinery, office equipment, commercial vehicles etc typically would qualify for 100% capital allowances.

Electric Cars

If you purchase a brand new fully electric car through your limited company, you can claim a First Year Allowance of 100% against your corporation tax bill.  Usually, other petrol/diesel cars are not eligible for this capital allowance saving.

The benefit in kind rate for the individual is currently only 2% and isn’t going to rise to 5% until at least 2027.

However if the vehicle is leased (and not owned) then the allowance is not available.

Directors Loan Interest

The use of Director’s loan interest can be a tax-effective method of extracting money from a Limited company and should be considered along with salary, rent, and dividends.

The reason being is that the interest payment is an expense in the company’s accounts, which reduces the profits chargeable to Corporation Tax.

If a Directors Loan Account has built up over time, such as initial start-up capital from the director, personal funding for asset expenditure, or dividends not yet taken as cash, and if the company is profitable (or expected to become such) it can be sensible to charge the company interest on this loan which is owing to the director.

Our previous blog explains this in a bit more detail.

Directors Salary

Depending on a director’s other circumstances or contract agreements, we typically suggest a director is on a gross salary of £12,570, which utilises their personal allowance.

Bad or Doubtful Debts

If you have any unpaid invoices over 6 months which may not be paid, we would sometimes discuss putting a specific bad debt provision in (rather than writing the actual sales invoice off the ledgers).  This means the relief qualifies for corporation tax in the accounts.

Budget for Corporation Tax

When looking at management accounts and asset expenditure, we like to give our clients an early warning of what their corporation tax liability would be.  As an example, a 31 March year-end would mean its tax is payable on 1 January.  By having good management accounts available we can let business owners know what they should budget for so it does not become a surprise nearer the time.

Before making any decisions on such expenditure we recommend you take professional advice.  At Price Bailey, we would be very happy to have a free no-obligation meeting to discuss how best to move forwards.

Dividends

Along with salaries and loan interest, dividends should also be considered.  Dividends can only be paid out of ‘distributable profits’ and during a pre year-end meeting we would discuss profit extraction accordingly to maximise the personal income position tax effectively.

Should you have any questions regarding the detail within this article, or wish to contact one of our experts to discuss year-end tax matters, please use the form below.