Planning for 2020
The end of another tax year is fast approaching and this may also coincide with your company year end. You still have time to put in place some tax planning strategies. We have highlighted a few of the key options you could consider:
Maximise capital allowances
The annual investment allowance is currently very generous at £1m (until 31 December 2020). This means that you can offset certain costs such as equipment, machinery or vehicles purchased for use in your business against your company profits in the year of purchase. This allowance extends to items such as CCTV systems or fire alarms and integral features like air-conditioning and solar panels. If you are considering a fixed asset investment for your business then it may be worth bringing this expenditure forward, before your year end, in order to benefit from the tax relief a year earlier.
Consider a company car
Cars do not qualify for the annual investment allowance. However, the purchase of an electric car is particularly tax efficient under the current tax regime. This is because it is eligible to receive a 100% first year allowance (FYA) as long as it is a brand new vehicle. The running costs of the vehicle are also tax-deductible within the business. If you are operating through a limited company and purchase a car with zero emissions there is no Benefit in Kind (BIK) tax charge in 2020/21, and therefore no personal tax implications and no Class 1A NIC to pay. In 2021/22, the BIK percentage would rise to 1%. This is clearly an attempt by the government to encourage more people to use zero emissions vehicles and is worth taking advantage of.
Think about a company pension contribution
Making a company pension contribution can be tax efficient. It will generally reduce the company’s taxable profit and therefore it’s corporation tax liability. No personal tax will arise until you draw your pension at some point in the future. The amount paid into a pension is not restricted to your net relevant earnings. However there is a tax free annual allowance as well as a lifetime limit to consider and therefore advice should be sought before you decide to make a contribution.
Check your total profit extraction
Consider the level of profits you have currently extracted from your company during the tax year 19/20. Make sure you have structured this to maximise your tax position. Do you have the balance between salary and dividends set to suit your circumstances? Have you made the most of the national insurance threshold salary level and the £2,000 dividend 0% tax threshold? Is your total taxable income close to £100,000 at which point you will start to lose your personal allowance?
Research and development
Small and medium sized businesses which undertake research and development (R&D) can currently benefit from a very generous tax relief which has the potential to reduce a company’s corporation tax liability or even entitle it to a cash credit. R&D activities which qualify can be wide ranging and can occur in any sector. If your company is taking a risk by attempting to “resolve scientific or technological uncertainties” then you may be carrying out a qualifying activity. This could include creating new products, processes or services or changing and modifying an existing product, process or service. If you think your company may qualify it is worth exploring this further as the tax relief is significant with a payable tax credit worth up to £33.35 for every £100 spent on a qualifying activity.
If any of the points above are of interest, we encourage you to get in touch as soon as possible to discuss these further with your usual Kreston Reeves contact.
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