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End-of-year planning - what to factor in?

Atif Butt 1280.jpeg

End-of-year planning - what to factor in?

Atif Butt looks at the opportunities you can take advantage of before the end of your financial year to minimise both company and personal tax bills…

Pharmacy business owners need to consider both their business and personal tax bills each year. For all individuals in the UK, the tax year runs to 5 April each year. If you run your pharmacy business as a sole trader or through a partnership in the UK, your financial year end will be determined by the dates you prepare your accounts to.

For those trading through a limited company, the year-end date will be determined by the company’s financial year, which is set at Companies House, and for many UK companies will be the end of March each year. So let’s look at some of the things you can do before your year end to minimize your overall tax bill.
Profit extraction
Business owners operating through a limited company have the option of paying themselves through a combination of salary and dividends, which are both taxed differently. Understanding this can help you to work out the most tax efficient way to extract profits from your business.
Salaries are paid net of tax and national insurance deductions, and the company will also usually be liable to employer’s national insurance contributions. Also, both the company and the individual will be liable for workplace pension deductions, although there is an exemption that directors can take advantage of.

Tax rates start at 20 per cent and rise to 40 per cent and 45 per cent depending on your income. You will also be liable for national insurance, currently at a rate of 12 per cent but rising to 13.25 per cent in April this year.

Dividends, on the other hand, are paid gross and taxed on the individual, and this is declared and paid through your personal tax return each year. The first £2,000 of dividends are tax free, with rates rising to 7.5 per cent and then 32.5 per cent and 38.1 per cent. Unlike salaries, dividends aren’t liable to national insurance. However, the dividend tax rates will also be rising by 1.25 per cent in April this year.

While on the face of it, it would appear that dividends are going to be the most tax efficient option, you also need to consider the fact that salaries are a tax-deductible expense for the business and so will reduce its corporation tax bill, whereas dividends will not.If you have loaned money to your business, you can also personally receive some tax-free interest each year from the company that can help to bring down your tax bill.

Before the end of your tax year is a perfect time to look at how you are paying yourself and making sure you are minimising your overall tax rate so that you end up with more money in your pocket. If necessary you can look at increasing your salary or changing the amount and/or timing of your dividends.

Companies that have married couples as shareholders can also consider varying the split of dividends between them by transferring shares to each other, which is tax free for spouses.
Pension contributions
If you’re the director of a limited company, the company can make contributions to your pension and get a reduction in its corporation tax bill as long as certain conditions are met. Under current legislation each individual has an annual allowance of £40,000 per year, and you can also go back to utilise any unused allowance for the last three years, as long as a pension scheme has been in place for you in that time.

Of course, putting money into a pension does mean it isn’t immediately available for you to spend, but it can be a really helpful tool in planning for your future and there can be other advantages when it comes to inheritance tax planning.
Capital expenditure
Another thing that can make a big difference in your business tax bill is capital expenditure such as purchasing a robot or delivery vehicle or carrying out a store refit. Bringing expenditure into this financial year, or deferring to the next, can have a big impact on your tax position and financial results for the year.

Last year’s budget saw the introduction of new super-deductions for qualifying capital expenditure incurred from 1 April 2021 to 31 March 2023, so if you are considering making a significant new purchase, take advice from your accountant on getting the timing right, so you can maximize the available tax savings!
A time for change
Before your year end is also the perfect time to look at your current set up to see if it is still right for you and your business, or if there are things that can be improved. If you are not happy with your accountants and feel like they could be advising you more proactively, consider changing to an accountant that can better meet your needs and add value to your business.

Take some time to examine whether your current bookkeeping system is right for your business, or if you could benefit from upgrading to something more suitable. Also, it may be worth looking at how your business is currently structured and whether there are any advantages in changing this, for example from being a sole trader to a limited company.

Atif Butt is a senior accountant at Hutchings Accountants.

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