The UK tax code has numerous reliefs and allowances that reduce tax when businesses invest in qualifying assets.
Some of the reliefs allow up to 100% of the invested cost to be written off against taxable profits and companies can presently write-off 130% of qualifying expenditure.
But aside from these tax incentives to invest, it is worth considering the bottom-line effect that the investment will have on business profitability.
Companies, who can claim a 100% write-off for an asset purchase, will presently save £190 for every £1,000 spent – this based on corporation tax rates being 19%.
Self-employed traders will save between £200 and £450 for every £1,000 spent – based on income tax rates ranging from 20% to 45%. There may also be Class 4 NIC savings.
In both cases the cash outlay (or debt acquired to fund a purchase) exceeds any overall reduction in tax payable.
You may be tempted to upgrade an asset out of hubris. For example, part-exchange a company car. If the vehicle offers savings in running costs or enables you to increase sales and profits, then the investment – you could say – makes commercial sense.
If the payback in additional profits is less certain, then the investment return may be less certain even when after-tax savings are considered.
Do the math…
When making decisions on major additions or replacements of plant, vehicles or other high-value equipment, be sure to consider all the effects on your business prospects. Otherwise, your tax reductions may come at the expense of hard-won cash reserves.
We can help you crunch the numbers to see if there is an overall benefit to your business. Please call before making any significant buying decisions.
The other side of the recent hikes in consumer energy costs – taking their toll on take-home pay across the UK – are the similar cost increases for industry.
Focussing on high-energy users, the government recently announced the following increased support for Energy Intensive Industries (IEE).
High energy usage businesses, such as steel and paper manufacturers, are set to receive further support for electricity costs as the government has confirmed details Friday 29 April, of the Energy Intensive Industries (EII) compensation scheme.
The scheme will also provide support for companies that manufacture batteries for electric vehicles, supporting the UK’s drive to capitalise on the global shift to greener technologies.
The scheme will be extended for a further 3 years and its budget will be more than doubled. This will help ensure the UK remains an attractive investment destination for energy intensive industries, whilst encouraging greater electrification to help cut emissions as part of the green industrial revolution across the country.
Today’s announcement will add to the more than £2 billion the government has provided since 2013 to support businesses in energy intensive sectors with the price of electricity bills.
Industry Minister Lee Rowley said:
“We want to keep the UK at the forefront of manufacturing, helping our energy intensive industries remain competitive and sustainable for the long term, and continuing to power our economy with thousands of jobs across the country.
“We are not only extending our support through the compensation scheme, by offering a greater level of compensation to eligible firms, we are delivering more relief from electricity costs for these industries.”
The scheme provides businesses with relief for the costs of the UK Emissions Trading Scheme (ETS) and Carbon Price Support mechanism in their electricity bills, recognising that UK industrial electricity prices are higher than those of other countries.
It will be interesting to see if the Treasury offers more support in the coming weeks for domestic consumers.
1 May 2022 – Due date for corporation tax due for the year ended 30 July 2021.
19 May 2022 – PAYE and NIC deductions due for month ended 5 May 2022. (If you pay your tax electronically the due date is 22 May 2022).
19 May 2022 – Filing deadline for the CIS300 monthly return for the month ended 5 May 2022.
19 May 2022 – CIS tax deducted for the month ended 5 May 2022 is payable by today.
31 May 2022 – Ensure all employees have been given their P60s for the 2021/22 tax year.
1 June 2022 – Due date for corporation tax due for the year ended 31 August 2021.
19 June 2022 – PAYE and NIC deductions due for month ended 5 June 2022. (If you pay your tax electronically the due date is 22 June 2022)
19 June 2022 – Filing deadline for the CIS300 monthly return for the month ended 5 June 2022.
19 June 2022 – CIS tax deducted for the month ended 5 June 2022 is payable by today.
Parliamentarians will debate the government’s ground-breaking Online Safety Bill which requires social media platforms, search engines and other apps and websites allowing people to post content to improve the way they protect their users.
Ofcom, the regulator, will have the power to fine companies failing to comply with the laws up to ten per cent of their annual global turnover, force them to improve their practices and block non-compliant sites. Crucially, the laws have strong measures to safeguard children from harmful content.
Ahead of Tuesday’s debate, the government is launching the next phase of its Online Media Literacy Strategy. It aims to help vulnerable and ‘hard-to-reach’ people, such as those who are digitally excluded or from lower socio-economic backgrounds, navigate the internet safely and teach them to spot falsities online.
The Department for Digital, Culture, Media and Sport (DCMS) will spend £2.5 million to advance the plan through the next year including on training, research and providing expert advice. This includes a new Media Literacy Taskforce featuring experts from a range of disciplines and a boost to the Media Literacy Fund, which gives teachers and local service providers the skills they need to teach people to improve their critical thinking of what they see online.
Employers can pay employees a fixed rate per mile to cover the costs of using their own vehicles on company business.
The present agreed rates per mile are:
- Cars and vans – 45p per mile for the first 10,000 miles and then 25p per mile.
- Motorcycles – 24p per mile.
- Bikes – 20p per mile.
What if you are paid more than these rates?
If your employer pays you more than these rates the excess paid over the agreed rates will be taxed as a benefit in kind.
Employers would need to declare these benefits at the tax year end on form P11D.
What if you are paid less than these rates?
If employers pay less than these rates employees can claim for the shortfall as an expense against their taxable income.
The Employment Allowance has risen from £4,000 to £5,000 – meaning smaller firms will be able to claim up to £5,000 off their employer National Insurance Contributions (NICs) bills.
Announced by the Chancellor at last month’s Spring Statement to reduce employment costs, the change takes an extra 50,000 firms out of paying NICs and the Health and Social Care Levy. This increases the total number of businesses not paying NICs and the Levy to 670,000.
According to the Chancellor, 94% of businesses benefitting from the £1,000 increase are small and micro businesses, and the sectors that will see the highest numbers of employers benefitting are the wholesale and retail sector (87,000); the professional, scientific and technical activities industry (63,000); and the construction sector (52,000).
Note, the Employment Allowance only covers employers’ NIC contributions.
Dividends are a distribution of company profits to shareholders. Historically, they have been taxed as unearned income – no National Insurance deductions.
This is still the case, but the Treasury have decided that the recent increase of 1.25% in National Insurance rates will also apply to dividends.
Since April 2016, the rates of Income Tax applicable to dividend income have been 7.5%, 32.5% and 38.1% for basic, higher and additional rate taxpayers, respectively.
Any individual who has dividend income can benefit from the dividend allowance which has been set at £2,000 since April 2018. Dividends within the allowance are not charged to tax and this will remain the case.
For 2021-22, the ordinary rate, upper rate and additional rate were 7.5%, 32.5% and 38.1% respectively. These rates increased by 1.25% to 8.75% 33.75% and 39.35% from April 2022.
The dividend trust rate of Income Tax was 38.1%, 2021-22. This also increased to 39.35% from April 2022 to remain in line with the additional rate.
Although the 1.25% increase sounds fairly insignificant, a basic rate taxpayer with £22,000 of dividend income would pay £1,750 tax in 2022-23. The equivalent tax due for 2021-22 was £1,500. The increase of £250 represents a 17% increase in tax due even though rates have only increased by 1.25 percentage points.
Director/shareholders of small companies who have adopted a high dividend, low salary approach will see continuing benefits from this strategy, but fine-tuning remuneration packages to include the new rates may be beneficial.
Planning to save tax may seem like a luxury buy in these days of rising prices and recovering from COVID fallout.
And yet tax planning is of real value in these uncertain times.
Whether your income and profits are increasing or reducing, there will be tax consequences. And unfortunately, to mitigate your tax footprint you will need to act in a timely manner. Wait too long and opportunities may be lost.
We are all entitled to use the present tax legislation to minimise our tax payments. What we are not entitled to do is evade tax by adopting strategies that stretch the credibility of laws set by parliament beyond those originally intended.
Penalties for engaging in tax schemes that would be challenged by HMRC as tax evasion can be punitive and in some cases are treated as fraud.
Tax planning achieves two major outcomes:
- It reveals one-off tax saving opportunities, but it also reveals ongoing tax savings; savings that you will reap for many years with no further investment in professional advice.
- Without straying into tax evasion, tax planning will also ensure you pay the minimum tax applicable to your circumstances, and no more…
HMRC are tax collectors. They are obliged to publish details of any tax savings options open to you, but under no obligation to tell you. A review of your personal and business circumstances is required to achieve this, and this is what tax planning advice will provide.
If you have concerns about your tax position in the coming tax year, 2022-23, pick up the phone. Let’s discuss your options in the round and see if an investment in tax planning would be of benefit.
We are all feeling the effects of inflation, increasing energy, fuel and the price of basic foodstuffs affect us all.
The Government Actuary’s Department has posted a blog article recently – Inflation, its personal – written by Christopher Ward, Actuary.
The article provides a useful update on the scope and cause of rising prices. It says:
“We are in a period of high inflation of prices for goods and services. The Office for National Statistics (ONS) shows one of the inflation indices has increased by 6.2% in the 12 months to March 2022.
“This is the highest that CPIH (Consumer Prices Index including owner occupiers' housing costs) has been since 1992. Among the main components of this increase are transport costs, such as petrol and diesel and the price of second-hand cars.
“During the pandemic prices for some goods and services fell, such as for eating out and holidays abroad. This reflected a rapid fall in demand which quickly shifted with demand gradually returning and supply then becoming challenging. Lockdown and workforce availability were key causes, but another factor was the reliance of so many products on semiconductors.”
This reference to the shortage of semiconductors is a real concern for manufacturers of consumer goods. The post continues:
“They [semiconductors] feature in ever more numbers of products such as computers, cars and even kettles. The demand for semiconductors has been outpacing supply.
“This has been compounded by other factors, such as the surge in early retirements during the pandemic and increasing energy prices due to the geopolitical situation.
“These factors and increasing semiconductor production can be managed with a view to bringing prices back down again. However, solutions such as building new semiconductor manufacturing facilities take time, so until then, prices will continue to increase.”
It is likely that inflationary pressures will continue to affect our personal financial position and our businesses for some time.
Readers who have concerns about the best way to manage these inflationary pressures are invited to call for an informal discussion.
When corporation tax increases from 1 April 2023, companies will need to consider three scenarios:
From 1 April 2023:
- The main corporation tax rate is increased to 25% where profits are over the upper profits limit, set at £250,000.
- A small profits rate will apply for companies whose profits are equal or below the lower profits limit, set at £50,000. The small profits rate is set at 19%.
- Companies with profits between the lower and upper limits (£50,000 and £250,000) will pay tax at the main rate of 25%, but this will be reduced by marginal relief. The effect of marginal relief is that the effective rate of corporation tax gradually increases from 19% where profits are £50,000 or less to 25% where profits are more than £250,000.
The limits are reduced if you have associated companies or if your accounting period is less than 12 months. This final comment is key.
A company with just one associated company – a company where there is common ownership – will see the upper and lower profits limits halved.
For example, if you have one associated company so that the limits are halved, from 1 April 2023, you will pay corporation tax at the small profits rate if your profits are £25,000 or less. If your profits fall between £25,000 and £125,000 you will pay tax at 25%, as reduced by marginal relief. If your profits are more than £125,000, you will pay corporation tax at the main rate of 25%.
Reviewing company structures
Business owners who control two or more companies could benefit from restructuring their business interests before 1 April 2023.
For example, if you have one company with taxable profits of £40,000 and one company with taxable profits of £5,000, the company with the taxable profits of £40,000 will not benefit from the small profits rate as the profits are above the lower limit of £25,000 that applies to a company with one associate. Merging the companies will mean that there is only one company and the combined profits of £45,000 will be charged at the small profits rate of 19%.
We can help
Restructuring, and considering your options in this way can take time. If you have an active share in more than one company the first job is to consider if your holdings constitute common ownership.
If they do, then consideration of the change in corporation tax rates will need to be undertaken to see if restructuring would be appropriate.