Practical tax tips to guide you through the tax system and help you plan to minimise your liability.
Please use the guide to help you identify planning opportunities, pitfalls to avoid and areas where you may need to take action and then contact us for further advice.
The rules, rates and allowances in this guide relate to the 2024/25 tax year and these may be different for other tax years.
Running a business
Starting up a business of your own is a big step and not one to take lightly. The taxation of your business is only one of many commercial and legal aspects of starting a business that you will need to consider.
Choosing a business structure
The alternative business structures are:
Sole trader
This is the simplest form of business structure since it can be established without legal formality.
The business of a sole trader is not distinguished from the proprietor’s personal affairs. If the business incurs debts which are unpaid, the creditors can seek repayment from the sole trader personally.
Partnership
A partnership is similar in nature to a sole trader but involves two or more people working together.
A written agreement is essential so that all partners are aware of the terms of the partnership. Again, the business and personal affairs of the partners are not legally separate.
Sole traders and partnerships are often referred to as unincorporated businesses and the individual owners as self-employed. The trading profits of both sole traders and partnerships are subject to income tax.
Limited company
A company is a legal entity in its own right, separate from the personal affairs of the owners and the directors.
A company provides protection from liability, which means that the creditors of the company cannot make a claim against the owners or the directors except in limited circumstances.
Companies are subject to corporation tax and individuals are only subject to income tax on any funds withdrawn from the company by way of salary or dividend, for example. In the past, this has been an advantage of incorporation as corporation tax rates have been lower than income tax rates. The recent increase in corporation tax has eroded that tax advantage for companies with larger profits.
These potential advantages carry the downside of greater legal requirements and regulations that must be complied with.
Limited Liability Partnerships (LLPs)
LLPs are a halfway house between partnerships and companies.
They are taxed in the same way as a partnership but are legally a corporate body. This again gives some protection to the owners from the partnership’s creditors.
In this guide we consider the differing tax treatments of the alternatives but you should choose which structure is right for you based on more than just the tax issues alone.
Taxation of unincorporated businesses
A new business should register with HMRC on commencing to trade. Income tax is paid on the profits of the business. The amount that the proprietor, or a partner in a partnership, draws out of the business is irrelevant.
From 2024/25, profits will be taxed on an actual basis; an individual will be taxed on any profits arising from the 6 April in one year to the 5 April in the next. Previously an individual would broadly have been taxed on the profits of the period of account ending in the tax year. This may add significant complexity to calculating the income tax payable for a trader who does not have a 31 March or 5 April year end as the profits will need to be apportioned into the tax year itself. We would be happy to assist you with these calculations.
Cash basis for smaller unincorporated businesses
The cash basis is an optional basis for calculating taxable profits. Previously, this was available to small unincorporated businesses upon election. If no election was made, the accruals basis applied. From 2024/25, most unincorporated businesses will have to calculate taxable profits using the cash basis as the default. The historic restrictions on who can use the cash basis have been removed. A business can elect to apply the accruals basis instead.
Under the cash basis, business profits are taxed on cash receipts less cash payments of allowable expenses. This may be more simple for the business owner to calculate. In addition, as the individual is only taxed on income actually received, they will not be subject to income tax on amounts paid late until those amounts are actually paid. Further details about the scheme:
- Cash receipts include all amounts received in connection with the business including those from the disposal of plant and machinery.
- Allowable payments include paid expenses but these still need to meet the existing tax rule of being wholly and exclusively incurred for the purposes of the trade.
- Payments include most purchases of plant and machinery, when paid, rather than claiming capital allowances.
- The interest payments restriction of £500 has been removed for 2024/25 onwards and any amount of interest can be deducted if incurred wholly and exclusively for the trade.
- Cash basis losses will be available to use in the same way as accruals losses, including sideways relief.
The optional accruals basis requires an election by the business owner for the year in which it is to apply. The election will stay in place until revoked by the business.
Do get in touch if you would like us to consider which scheme is appropriate for you and your business.
Working out profits
Not all of the expenses that a business incurs are allowed to be deducted from income for tax purposes but most are. It is important that you keep proper and comprehensive business records so that relief may be claimed.
Non-deductible expenses include those which are not wholly and exclusively for the purposes of the trade – client entertaining and private expenses of the sole trader are common examples of this. Depreciation is another type of expense which is not deductible from trading profits. Instead a tax-standardised version of depreciation, known as capital allowances, may be claimed (see later).
Trading and property income allowances
Trading and property income allowances of £1,000 per annum are available. Individuals with trading or property income of £1,000 or less do not need to declare or pay tax on that income. Those with income above the allowance are able to calculate their taxable profit either by deducting their expenses in the normal way or by simply deducting the relevant allowance.
Paying the tax
The self-employed may have to pay tax and class 4 NICs three times a year, namely:
- 31 January in the tax year
- 31 July following the tax year
- 31 January following the tax year.
The first two payments are based on the income tax and class 4 NIC liability for the previous tax year (less any amounts deducted at source like PAYE) and the final payment is the balancing amount.
Capital allowances
When assets are purchased for the business, such as machinery, office equipment or motor vehicles, capital allowances are available. As with expenses, these are deducted from income to calculate taxable profit. The below allowances are available to both unincorporated businesses (using the accruals basis) and companies.
Plant and machinery - Writing Down Allowances (WDA)
Plant and machinery purchased by a business is eligible for annual WDA of 18% per annum for most plant and machinery and 6% per annum for certain expenditure which is ‘integral’ to a building such as air conditioning or water systems and other long life assets. These allowances are calculated on a reducing balance basis rather than straight line on cost.
Plant and machinery - Annual Investment Allowance (AIA)
The AIA gives a 100% write off on most types of plant and machinery costs, but not cars, of up to £1,000,000 per annum. Any costs incurred in excess of the AIA will attract an annual ongoing allowance of 6% or 18% depending upon the type of asset.
Motor cars
The tax allowance on a car purchase depends on CO2 emissions. From April 2021 purchases of cars with emissions not exceeding 50g/km attract an 18% allowance and those in excess of 50g/km are only eligible for a 6% allowance. A first year allowance (FYA) of 100% is available on new zero emission cars (for cars purchased before 1 April 2025).
Structures and Buildings Allowance (SBA)
The SBA gives allowances of 3% per annum to qualifying expenditure on the construction of new or the renovation of non-residential structures and buildings.
Companies
Unlike sole traders and partnerships who are subject to income tax on the trading profits of the business, companies are subject to corporation tax on profits. In addition, individuals may be subject to income tax on the extraction of profits from the company; thus profits may be taxed on both the company and the individual. However, there may be cash savings to operating as a company as the corporation tax rate will be lower in some circumstances than the applicable income tax rate on the profits.
Corporation Tax
The rate of corporation tax payable is dependent on the level of taxable profits in the company (plus certain dividends received by the company).
| Taxable profits | Corporation tax rate |
|---|---|
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£0 – £50,000 |
19% |
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£50,000 – £250,000 |
25% less marginal relief |
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Over £250,000 |
25% |
Unlike income tax bands, the corporation tax rate is applied to the total taxable profits of the company. Therefore a company with profits of £400,000 would have a corporation tax liability of £100,000 (being 25% of £400,000). The operation of marginal relief acts to gradually increase the rate of corporation tax from 19% to 25% – broadly this results in an effective tax rate of 26.5% on profits which fall between £50,000 and £250,000.
Companies are taxed on the basis of their accounting period which usually aligns to the period for which the company prepares accounts.
| Tax Tip |
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Marginal relief has the impact that any profits falling between £50,000 and £250,000 are effectively taxed at 26.5%. Therefore, maximising deductions available will be particularly important for those companies whose profits fall between these thresholds. We can assist you with identifying any claims for deductions for your business. |
Tax on profits
The profits of a limited company are calculated in a similar way as for unincorporated businesses and the same rules with regard to expenses and capital allowances generally apply. Remember though that the salaries paid to directors (but not the dividends paid to shareholders) are deductible from the profits before they are taxed.
| Tax Planning |
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Companies are a popular business structure as they may result in less tax being paid overall.
However, the saving is dependent on profits and withdrawals. We would be happy to discuss the implications of incorporation with you before you decide whether or not to incorporate your business.
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Capital allowances for companies - full expensing
In addition to the AIA and general writing down allowances which are available to companies as well as unincorporated businesses, from 1 April 2023 companies investing in qualifying new plant and machinery can claim:
- full expensing providing allowances of 100% on most new plant and machinery investments that ordinarily qualify for 18% main rate writing down allowances
- a first year allowance of 50% on most new plant and machinery investments that ordinarily qualify for 6% special rate writing down allowances.
Tax relief for expenditure on Research and Development (R&D)
Companies with expenditure in qualifying R&D activities can receive tax relief. For accounting periods starting on or after 1 April 2024, the previous SME scheme and the R&D expenditure credit (RDEC) scheme will merge. The new scheme will broadly follow the rules of the RDEC:
- There will be a 20% above the line credit.
- Loss-making companies will benefit from a notional tax rate of 19% (small profits rate) and not 25% (main rate), increasing the benefit.
- Where R&D activity is sub-contracted out, the company who bears the risk will be the one to make the claim.
- Claims will be restricted to UK-based activities and workers, subject to specific exemptions.
R&D intensive companies will operate under a separate scheme, with enhanced relief where R&D expenditure accounts for 30% or more of total expenditure.
This is a complex area. Please get in touch if you would like to know more.
Payment of tax
Corporation tax is usually payable nine months and one day after the year end but payments may be accelerated for large companies.
Tax on ‘drawings’
Directors of a company will normally be paid a salary and this is taxed under PAYE as for all employees. The cost of this, including the employer’s NICs, is generally an allowable expense of the company. Shareholders of the company in contrast may be rewarded by the payment of dividends on their shares. Dividends are paid out of profits after taxation.
| Tax Tip |
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In most small companies the directors and shareholders are one and the same and so they can choose the most tax efficient way to pay themselves. Using dividends can result in savings in NICs. However, this requires careful planning, especially given the increase in corporation tax rates. Please talk to us to decide what is appropriate for you. |
Warning - close company loans to participators
A close company (which generally includes owner managed companies) may be taxed where it has made a loan or advance to individuals or their family members who have an interest or shares in the company (known as participators). The tax charge is currently 33.75% of the loan if it is outstanding over nine months after the end of the accounting period. The tax charge is repaid to the company nine months and one day after the end of the accounting period in which the loan is repaid.
Further rules prevent the avoidance of the charge by repaying the loan before the payment date and then effectively withdrawing the same money shortly afterwards. This is a complex area so please do get in touch if this is an issue for you and your company.
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Ensure that sufficient salary and dividends are drawn from the business to prevent these charges arising unnecessarily on an overdrawn director’s current account. We can also ensure that overdrawn accounts are cleared properly. Please contact us if you would like to discuss the right options for you and your business. |
Employer obligations
As an employer you will have many responsibilities. These will include employment law requirements and the need to enrol workers into a work based pension scheme (Pensions Auto Enrolment) which are not covered in this guide.
Real Time Information
Real Time Information (RTI) reporting is mandatory for almost all employers.
Under RTI, employers or their agents are required to make regular payroll submissions for each pay period during the year. The submissions detail salary and other employment payments made to and deductions such as income tax and NICs made from employees. These submissions must generally be made on or before the date the amounts are paid to the employees.
Penalties apply to employers who fail to make returns on time. These penalties range from £100 to £400 per month depending on the size of the employer. Interest and penalties also apply for failing to pay on time.
The employer must also report details of expenses and benefits provided to employees.
Value Added Tax (VAT)
VAT is a tax ultimately paid by the final consumer and businesses act as the collectors of the tax.
What does VAT apply to?
VAT is chargeable on the supply of certain goods and services in the UK when made by a business that is registered for VAT (see later).
A registered business must charge VAT on its taxable supplies (broadly the sales made) which is known as output VAT. There are currently three rates of VAT which can be payable. These are the standard rate of 20%, the reduced rate of 5% and the zero rate.
The zero rate applies where the supply is deemed to be subject to VAT but the output VAT is charged at 0%, meaning that no VAT is actually payable.
A business also pays VAT on the goods and services it buys. This is known as input tax and may be reclaimed by a VAT-registered business.
If the output tax exceeds the input tax, then a payment of the difference has to be made to HMRC. If input tax exceeds output tax a repayment of VAT will be made. This calculation is generally done on a quarterly basis. However, where repayments occur regularly, it is possible to opt for monthly VAT returns.
Some input VAT is not reclaimable by a VAT-registered business. Two common examples are VAT incurred on entertaining UK business customers and VAT on the purchase of a car.
Certain supplies of goods and services are not subject to VAT at all and are known as exempt supplies. A business that makes only exempt supplies cannot register for VAT and will be unable to reclaim any input tax.
Do I need to register?
A business must register if its taxable supplies exceed an annual figure of £90,000 (from 1 April 2024). If taxable supplies are less than this a business may still register voluntarily. So, for example, if the business makes only zero-rated sales, it can still register and reclaim the input tax suffered.
VAT can affect competition. A plumber, for example, who sells only to the general public will be at a disadvantage if they have to register for VAT. They may have to charge up to 20% more than a plumber who is not registered to earn the same profit.
On the other hand, if the same plumber only works for other VAT-registered businesses, such as building companies, then it will not matter whether they are registered because the customer will generally be able to recover the VAT that is charged.
Indeed, in general, a business that always sells to other VAT-registered businesses will normally register, even if below the annual limit, because then it can reclaim VAT on purchases and expenses. This will improve profit and can be especially relevant for new businesses because there are often high initial set up costs that carry VAT. On the other hand, registration comes at the cost of having to meet record keeping requirements, a need to submit online VAT returns and pay online and on time.
| Tax Tip |
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When you first register for VAT you can reclaim input tax on goods purchased up to four years prior to registration provided they are still held when registration takes place. VAT on services supplied in the six months prior to registration may also be reclaimed. |
Making Tax Digital (MTD)
MTD for VAT
MTD for VAT is part of a government strategy which will ultimately require taxpayers to move to a fully digital tax system.
Under the MTD for VAT rules, all VAT-registered businesses must keep digital records for VAT purposes and provide their VAT return information to HMRC using MTD functional compatible software.
There are some exemptions from MTD for VAT. However, the exemption categories are tightly drawn and are unlikely to be applicable to most VAT-registered businesses.
We can help you to meet your MTD for VAT obligations.
MTD for income tax
MTD for income tax was expected to be introduced from April 2024. This has now been delayed; self-employed individuals and landlords with income over £50,000 will be mandated to apply MTD from April 2026. Those with income over £30,000 will be mandated from April 2027 and the government will review the application of MTD for smaller businesses.
We can help you assess when MTD will be required for your business and to meet your obligations.
For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.
