Plan ahead to stay ahead: New Year tax considerations for business owners

Major changes in global, social, economic and political landscapes have caused ripple effects for business owners across the UK. With the markets and legislative landscapes in constant flux, tax, interest and inflation rates are on the rise.

As the year comes to an end, it’s the perfect time to reflect on this year’s achievements as well as looking ahead to future challenges.

Now that we’re heading towards the end of 2023, the rise in tax, inflation and interest rates are starting to have a tangible effect. Especially for those who are being hit with unexpected interest charges for not paying their liabilities on time.

This can have a real impact on cashflow in what is already a choppy market. So, in today’s economy, business owners need to stay mindful, especially when it comes to tax. Whether that’s keeping abreast of legislative and policy changes, tax rates or reviewing how effective your business structure really is.

Below, we’ve outlined what you should consider to help devise a strategic tax plan for the year ahead.

Changes to the basis period

Perhaps one of the most notable changes to be aware of this year is the basis period reform (BPR). As HMRC prepare to bring all business taxes in line for 2024, it’s important to note the transitional rules that will apply to the current financial year.

BPR will affect unlimited businesses whose financial year falls outside of 31st March and 5th April.
If this is the case, additional tax charges on transitional profits generated by businesses may apply as a result of bringing tax forward on some of the profits generated.

To avoid being stung with a surprise tax bill, business owners should be aware of the changes and plan their tax according to the changes ahead. There’s no time like the present, so we would always advise to get in touch with your accountant as soon as possible.

More information on the basis period reform can be found here.

Changes to dividend and capital gains tax annual allowances

Further changes to dividend and CGT rates should be taken into consideration to plan ahead for the new financial year.

Capital gains tax and the annual exempt amount 

When you sell or dispose of an asset or shares, you could be liable to capital gains tax (CGT) if you make a profit. Depending on which tax bracket you fall into the CGT rate stretches up to 20% (and up to 28% if the asset you’re selling is residential property other than your home).

Currently, there is an annual exempt amount of £6,000 which is granted on the sale of assets, before becoming liable for CGT. However, this will be cut by half to £3,000 in April 2024.

Don’t be caught out by this change. If you’re selling assets, shares, or your business make sure to take the new annual exempt amount (AEA) rates into account when planning ahead.

Annual tax free allowance for dividend income

Similarly, the annual tax-free allowance for dividend income will also be reduced in the next financial year. Currently this stands at £1,000, anything over this is taxable. This tax-free allowance will be halved to £500 in 2024.

Again, dividend-related income exceeding the annual allowance will be charged at the same rate as your income-tax band. This could be either 8.75%, 33.75% or 39.35%.

HMRC’s clamp down on R&D claims

The UK boasts thousands of innovative businesses working at the cutting edge of science and technology. However, the tax relief that rewards this innovation has become a point of contention for HMRC in the past few years.

To prevent abuse of the research and development tax relief (R&D) scheme, HMRC clamped down on the relief. With new legislation and a new approach to the relief, the number of enquiries issued by HMRC have risen steadily to stop non-compliance within the system.

However, innovative businesses shouldn’t be deterred. Planning ahead and keeping sufficient financial and business documentation could make your claim as accurate as possible. Due to increasingly tight compliance, you should always consult a qualified advisor on the relief. They will be able to review your claim and ensure that you remain compliant.

Alternatively, looking into other reliefs such as patent box could be an option to boost your tax efficiency going into 2024. This could help bridge the gap missing in your cashflow if you have been impacted by recent enquiries, the period basis reform or other tax hits this year.

Have you considered paying in quarterly increments?

The way business owners approach their tax planning is one of the biggest factors in creating a healthy cashflow.

Some business owners may not realise that there is no obligation to pay your tax liabilities all in one go. Exploring payment options could be beneficial if your business is struggling with excess cashflow.

Although there is a one year grace period after a business is set up, 12 months will pass surprisingly fast. Cashflow forecasting will help you to plan ahead and see whether you could benefit from paying in quarterly increments rather than one large sum at the end of the financial year.

Is it time to restructure?

When it comes to tax planning and cashflow, look at how your business is structured. Could this be more efficient?

The key to this is assessing how your business operates as a group. Can you identify any entities within the group that are no longer needed? If this is the case, it may be time to restructure.

Over the past few years we have seen a huge uptake in the number of businesses restructuring to become an moving to employee ownership trusts (EOT). They are a type of employee benefit trust, that holds the controlling stake of the business on behalf of all employees. The trust is set up above the company and current shareholders sell over 50% of their shares to the trust, allowing employees a stake in the business.

EOTs allow tax-free employee bonuses of up to £3,600 per employee each year. This is usually distributed as a tax-free profit. Although the bonus is tax-free, national insurance contributions will still apply. Offering both financial incentive and an emotional tie to the business could just be what your business needs to boost motivation and productivity within your teams. This could save on recruitment costs further down the line.

Ensuring you plan ahead to stay ahead

Staying in the know when it comes to legislative changes is half the battle. The next half of the equation lies in applying those changes to your business needs, and boosting your cashflow. It can be a challenge to know where to start. Speaking to a qualified tax advisor will help you navigate complex tax rules and regulations, ensuring you remain both compliant and efficient.

Now is a great time to reflect on where you are as a business and start actioning goals for the year ahead. When it comes to tax, you should always plan ahead to stay ahead.