Tax planning checklist for sole traders and partnerships

By Dan Cozens, Accounting Manager, Armstrong Watson

At the start of a new tax year, there are some considerations sole traders and partnerships should make when it comes to tax planning over the next 12 months.

Think about what you are aiming to achieve. Lower profits may mean a lower income 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 business and the profit share taken from it will affect your mortgage options.
   
• Funding - Lenders will consider the profits of the business when looking at repayment/affordability.

Considerations to mitigate your income tax liability

Capital expenditure

• 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 under the Annual Investment Allowance.

• Remember that disposals made before or after the end of your accounting period may affect the taxable profit.
   
• If you’re looking to purchase a new car be aware that cars don’t always get 100% allowances:
  • New and unused cars – CO2 emissions of 0g/km – 100% first year allowances
  • Second hand electric cars – 18% of the car’s value
  • CO2 emissions are 50g/km or less – 18% of the car’s value
  • CO2 emissions are over 50g/km – 6% of the car’s value

You should also be mindful of expenditure that will not affect your profits. Spending on matters that don’t happen until after the year-end or on products that are in stock at the year-end won’t reduce the current year profits. Meanwhile the purchase of land does not attract any income tax deductions.

Pension contributions

If you’re a higher rate taxpayer you may be eligible to make pension contributions to extend your Basic Rate band. We would recommend you speak to your adviser prior to making any contributions as there are a number of factors to be taken in to consideration. To impact the 2024/2025 tax return payments must be made in the your pension by 5 April 2025.

Basis period changes

Businesses will also need to consider how the incoming basis period changes could impact their tax bills as they will now be taxed on profits generated in a fiscal year and not those aligned to the business’s accounting year end and could lead to a larger than expected taxable profit for the year (and potentially future years). If you have not already spoken to your adviser about these changes we would recommend doing so.