From 1 April 2023 corporation tax rates changed. They now depend on the level of profits arising in the year.
Companies whose profits do not exceed £50k will continue to be taxed at 19%. However, for companies whose annual profits exceed £250k the tax rate will increase to 25% and those with profits in the range of £50k and £250k will pay a rate of between 19% and 25% (equal to an effective marginal rate on profits arising in this band of 26.5%). The bands of £50,000 and £250,000 are reduced accordingly if a company has associated companies or if the accounting period is less than 12 months.
Therefore, it is more important than ever to monitor and reduce taxable profit where possible, but without incurring a high level of additional personal tax. Here are some reminders of how this can be done.
Pay yourself a salary
Salary is a tax-deductible expense just like any other business expense. It reduces taxable profit and so saves the company from paying corporation tax of at least 19%. Whilst you may be liable for personal tax on the salary (if you have already utilised your personal allowance of £12,570), it is still a tax efficient way of extracting funds from the company up to a certain level.
From 2023/24 employees start to pay Employee NI on salary over £12,570. Therefore, the optimum salary will generally be £12,570 or £1,047.50 per month. Whilst you will be liable to pay some Employer NI, this will be offset by corporation tax savings. If your profits are higher than £50,000 then the savings increase due to the extra saving of corporation tax. However, should you prefer not to pay any Employer NI, and assuming you do not qualify for claiming the employment allowance, then a salary of up to £9,100 should be paid.
Pay your spouse/children a salary
Provided you can demonstrate that the family member is genuinely carrying out work for the business, you could consider paying them a small salary too. You would need to be clear about the working hours, rate of pay and duties to be performed. Whilst the minimum wage does not apply to children who live with you, this rate nevertheless serves as a good guide for the rate you might wish to pay. For children under 16, you should be mindful that there are restrictions placed on the number of hours they are allowed to work each week. For employees under 21, no employer NI is payable on salary of up to £50,270, saving a potential 13.8%.
Make a pension contribution directly from the company into a personal pension plan
Pension contributions paid directly by your company into a personal pension plan are allowable as a deduction for corporation tax purposes, without any restriction to the amount of salary you have paid yourself. This can make them a very tax efficient method of extracting funds from the company. However, you will need to have sufficient pension allowance available (please check this with your financial advisor before making any payment). The annual allowance increased from £40k to £60k in 2023/24
We are not authorised to give advice on pension payments so please consult with an Independent Financial Advisor (IFA).
Working away from home – incidental expenses
When you stay away overnight on business, you can claim the costs of the accommodation and subsistence. You may not be aware that you can also claim for personal incidental expenses to cover items such as toothpaste, laundry, newspapers, telephone calls to family etc.
HMRC allows £5 per night for overnight stays in the UK and £10 per night for overnight stays outside the UK. No receipts are required to make this claim, although you must have incurred the costs and be prepared to justify the amount claimed. The items should not be included in the hotel bill.
Electric cars currently enjoy a particularly favourable low benefit in kind rate of 2%. This has been frozen until 2025/26 when the rate will increase by 1% and then again by 1% in 2026/27 and 2027/28. This means that in 2027/28 the taxable benefit will be 5% pa x the list price, which is still a lot less than on other cars where the top rate can be 37%.
New and unused cars with zero CO2 emissions attract a full 100% first-year allowance, meaning that if the company purchases such a vehicle the cost can be used to set against company profits in the year of purchase. However, note that if the company sells the car back to you (for instance if you close the company), some of this allowance will be repayable.
Subscriptions and training
Generally, it is more tax efficient to pay for professional subscriptions from the company because they are paid out of pre-tax profit, whereas paying them from personal funds means they are paid from taxed income. Similarly, training undertaken that relates to the business and which enhances or improves existing skills (such as CPD), rather than acquiring new ones, can be paid by the company, or claimed from the company as a personal expense.
Equipment used wholly and exclusively to assist you in your work can be claimed, and this includes anything you already own which can be sold to the company at its current market value. Such items might be printers, laptops, office desks etc. Minor personal use of the equipment is allowed but the main use must be for business, otherwise a benefit in kind will arise.
For more information on any of the above please contact Blackman Terry on 01444 882381 / firstname.lastname@example.org