Pre-year-end planning for limited companies

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As your company year-end approaches there are some considerations you should make.

What are you aiming to achieve? Lower profits may mean a lower corporation tax bill but that isn’t necessarily the best result for the business. There are some reasons you may want to show a higher profit and pay more tax:

• Your mortgage - The performance of your company and dividends drawn from it will affect your mortgage options.
• Funding - Lenders will consider the profits of the business when looking at repayment/affordability.
• Sale - If you are considering selling your business, you will want to ensure the profit and loss and balance sheet look as strong as possible for valuation purposes. Planning needs to be carried out well in advance of any sale and further considerations made regarding Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief).

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Considerations to mitigate your corporation tax liability

• Assets must be delivered and in use to claim tax allowances. On most plant and machinery, fixtures and fittings, 100% relief is given up to a limit of £1 million.

• The ‘Super Deduction’ tax relief ends on 31 March 2023. This applies to spend on plant and machinery on new and unused items. Cars do not qualify but commercial vehicles do. This temporary tax relief gives a further 30% of tax allowances meaning an item that costs £10,000 to purchase becomes £13,000 for tax purposes. At a tax rate of 19% the corporation tax saving pre-31 March 2021 would have been £1,900, but with the additional 30% would give a tax savings of £2,470.
• Remember that disposals made before or after the end of your accounting period may affect the taxable profit.

Pension contributions

• Employer pension contributions can form part of a remuneration package. A lump sum contribution could be made for one of the directors. This is treated as a business expense and therefore gets tax relief by reducing profits.
• You may also consider delaying pension contributions, however you should speak to your financial adviser on this to ensure pension contribution allowances are not being lost.

Other company tax reliefs

• During the process of considering year-end planning, this is also a good opportunity to look at whether there is expenditure which may qualify for Research & Development relief.

Further considerations 

Be mindful of expenditures that will not affect your profits, such as:

• Spending on matters that don’t happen until after the year-end such as paying a deposit for an event in the following year, buying an annual subscription/insurance as the amount is pro-rated to the period it relates.
• Dividends – these are paid out of post-tax profits and will not reduce the corporation tax

From 1 April 2023, corporation tax rates are changing:

• Taxable profits up to £50,000 at 19%
• Taxable profits between £50,000 and £250,000 falls into a marginal rate of tax between 19% and 25%
• Taxable profits over £250,000 at 25%

Companies may wish to consider showing a higher profit to 31 March 2023 to take advantage of the lower tax rate. You may consider delaying the capital expenditure, forgoing the Super Deduction allowance and saving tax before the rates increase on 1 April 2023.