How to minimise your personal tax bill as a small business owner in the 2024-25 tax year

Contents

Key takeaways

Why aren’t expenses as important for saving tax

Making the most of your allowances and the basic rate band

Dividend allowances

Capital gains allowances

Other allowances

Perks of being a director

Early tax planning and professional advice

Summary

Frequently asked questions

Looking to cut down on taxes this year? In this guide, we show you precisely how small business owners can lower their tax bills for 2024-25. We get right into the nitty-gritty – from capitalising on exemptions to strategic income planning – equipping you with the tools you need to save money without complicating things.

Key Takeaways

  • Effective tax reduction for small business owners relies more on structuring income and maximising various allowances, rather than focusing solely on business expense deductions.

  • Leveraging personal allowances, income tax bands, and capital allowances can significantly reduce tax liabilities, with consideration of pension contributions and various other tax reliefs playing an important role in tax planning.

  • Early tax planning and seeking professional advice are crucial for small business owners to align tax-saving strategies with financial goals and ensure compliance with tax regulations.

Why aren’t expenses as important for saving tax?

Many mistakenly believe that concentrating on business expenses is the top tax-efficient method to reduce your corporation tax bill. In reality, the tax savings from manipulating expenses tend to yield minimal benefits. Instead, the real key to achieving significant tax savings lies in effectively structuring your income and maximising the various allowances available.

Instead of dwelling on tax deductions from business expenses for corporation tax, consider focusing on income structuring. This is definitely the most tax efficient way to reduce your corporation tax and overall tax burden.

Making the most of your allowances and the basic rate band

In the following section, we will explore the range of allowances available. We’ll also strategise an optimal plan you can tailor to meet your personal financial wealth goals.

Using your income tax bands

A tax band is like a threshold. It’s a specific income level that determines the rate at which you’ll pay tax. Importantly, it’s a common myth that all your income is taxed at the higher rate once you cross a tax band. In reality, only the income within that band is taxed at the higher percentage.

This means that you’re never worse off by earning more from a tax perspective. Therefore, it’s vital as a business owner to learn how to leverage your income tax bands effectively.

Personal Allowance

One of the most well-understood tax savings opportunities is the personal allowance. Currently set at £12,570 for the 2024-25 tax year, this allowance lets you earn up to this amount without paying any income tax.

This tax-free allowance, which applies to your total taxable income, plays a significant role in your tax planning strategy. Utilising it fully can help to reduce your overall tax liability and enhance your net income.

Basic Rate Band

The basic rate of tax is an integral part of your personal tax strategy. While it’s not a tax-free opportunity, it’s important to note that most individuals will need to pay some tax as they can’t survive solely on tax-free allowances.

With careful planning, you can ensure that tax is paid at the basic rate, which is 20% for income, 8.75% for dividends, and 10% or 18% for capital gains. Even if you don’t need the money instantly, it can make sense to take it at the basic rate. Otherwise, you may end up ‘trapped’ later on and be forced to earn it at a higher rate due to personal needs.

Higher and Additional Bands

From a tax planning perspective, it’s generally not desirable to take income out at the higher or additional rates. This is mainly because of the increased tax percentages and potential loss of benefits.

For instance, the higher rate is 40% for income, 33.75% for dividends, and 20% or 24% for capital gains. The additional rate is even steeper, with 45% for income, 39.35% for dividends, and 20% or 24% for capital gains. Furthermore, you could start losing your child benefit at £60k, your personal allowance at £100k of income, and your pension allowances at £260k. Therefore, effective strategising is essential to steer clear of these higher and additional bands.

National Insurance Loopholes

National Insurance (NI) can make up a significant part of your overall tax bill if you’re self-employed or in a partnership. But the good news is, there are certain NI allowances that work independently of the tax allowances mentioned above.

For instance, NI is calculated per employment, so it can still be worth taking a salary even if you have other income to use up your personal allowance, as it could save you dividend tax. If leveraged strategically, these NIC loopholes could significantly lower your tax burden.

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Dividend Allowance

In the tax year 2024-25, for a director, the most tax-efficient method of payment is a combination of a low salary and regular dividend payments. While directors’ salaries are subject to Income Tax and Class 1 National Insurance, dividends are taxed at lower rates and are exempt from National Insurance.

Dividends, paid from post-Corporation Tax company profits, aren’t deductible as a business expense for tax calculations. As such, a combination of receiving a salary and dividend payments often results in a lower total tax bill compared to receiving full compensation through salary alone.

Capital Gains Allowances

Illustration of capital gains allowances

Leveraging capital gains allowances is another important aspect of tax planning. These allowances can be used to minimise tax liabilities when selling assets.

Business Asset Disposal Relief

Business owners who have owned their business for a minimum of two years may qualify for a reduced Capital Gains Tax rate of 10% on all gains from qualifying assets, known as Business Asset Disposal Relief.

To qualify, the business must be a ‘personal company’, with the individual holding at least 5% of both shares and voting rights for at least two years before the sale. This relief can be a valuable tool in building personal wealth without paying higher rates of tax.

Other Allowances

In addition to the aforementioned capital allowances, there are various other allowances that can be harnessed for tax savings.

Pension Contributions

Pension contributions made by a company can be considered a tax-deductible expense, thus reducing the overall Corporation Tax liability.

In fact, employer pension contributions, seen as a legitimate business expense, can be deducted from total profits to lower corporation tax liability. This means that strategic pension contributions can lead to significant corporation tax relief and a reduction in your overall tax bill.

Trading Allowance

The trading allowance in the UK provides a tax exemption on casual or miscellaneous income up to £1,000 per tax year.

This allowance can be utilised alongside the personal allowance, further enhancing your tax savings potential. It’s worth noting, though, that if self-employment or miscellaneous income exceeds the trading allowance threshold, you need to register for Self Assessment and file a tax return.

Redundancy Pay

In the UK, redundancy payments up to a threshold of £30,000 are exempt from income tax, offering a tax relief opportunity in the event of job termination.

Besides the tax-free redundancy pay, costs covered by an employer for retraining or counselling redundant employees are typically tax exempt in the UK. This is another aspect to consider when planning your tax.

Enterprise Investment Scheme/SEED Enterprise Investment Scheme

Investors in the UK participating in the Enterprise Investment Scheme (EIS) can claim Income Tax relief for shares issued during the tax year ending 5 April 2024 or, in certain cases, the following year.

The relief enables investors to claim tax relief:

  • 30% relief on eligible amounts invested in shares issued within the tax year

  • subject to a maximum of £2 million per tax year

  • and the excess over £1 million being limited to investments in knowledge-intensive companies.

This can be a significant boon for small business owners looking to invest in their own or other companies for business purposes.

Perks of Being a Director

Illustration of director perks for tax benefits

Holding a director position also brings its own set of tax benefits. Let’s explore some of these benefits.

Tax Benefits of Electric Company Vehicles

UK businesses may be eligible for a government plug-in grant, which brings down the purchase price for specific low-emission vehicles like motorcycles, vans, and taxis.

Additionally, the Benefit-in-Kind (BIK) tax for electric company vehicles is 2% from 2023 to 2025, providing a low tax burden for businesses using electric cars. Thus, investing in electric company vehicles can be a tax-efficient strategy.

Home Office Deduction

With the rise of remote work, the home office deduction has become an important tax saver. Home office deductions might be available to small business owners who carry out substantial duties related to their main business from home.

The UK’s HMRC provides a flat rate claim of £6 per week for home expenses without requiring receipts. But if your business expenses exceed this, you can claim a larger amount by accurately apportioning home expenses between business and personal use.

Trivial Benefits

Trivial benefits are small perks or gifts given to employees that have a value of £50 or less. They are usually given as gestures of goodwill and can be tax-free provided they meet specific requirements.

For instance, the benefits must:

  • cost less than £50

  • cannot be in cash form

  • should not be a reward for work or performance

  • must not be part of a salary sacrifice scheme

These trivial benefits can add up to significant tax savings over time.

Early Tax Planning and Professional Advice

Illustration of early tax planning

Initiating tax planning at the onset of the financial year provides a comprehensive understanding of tax-saving strategies and how they align with financial objectives.

Moreover, professional tax advisors with specialised knowledge in tax regulation can provide customised advice to reduce tax liabilities while ensuring compliance. Therefore, it’s not just important to plan early, but also to seek expert advice for the best tax planning.

Summary

As we’ve explored in this guide, there are numerous strategies that small business owners can employ to minimise their tax bill in the 2024-25 tax year. From optimising allowances and leveraging the basic rate band to capitalising on director perks and other allowances, tax planning can yield substantial savings.

Remember, the key to effective tax planning lies in understanding the various allowances and exemptions available and aligning them with your financial goals. Engage in early tax planning and seek professional advice to ensure your strategy is both compliant and effective.

Frequently Asked Questions

What is the most tax-efficient method for a director to pay themselves in the tax year 2024-25?

The most tax-efficient method for a director to pay themselves is through a combination of a low salary and regular dividend payments. This strategy helps minimise tax liabilities while providing income.

What is the trading allowance in the UK?

The trading allowance in the UK allows for a tax exemption on casual or miscellaneous income up to £1,000 per tax year.

What benefits do electric company vehicles offer?

Electric company vehicles offer cost savings for businesses, including reduced purchase prices and low Benefit-in-Kind (BIK) tax rates, making them a financially advantageous option for companies.

How does the home office deduction work?

To qualify for a home office deduction, small business owners can claim a flat rate of £6 per week for home expenses without receipts from the UK’s HMRC. If the business expenses exceed this, a larger amount can be claimed by accurately apportioning home expenses between business and personal use.

What are trivial benefits and how can they lead to tax savings?

Trivial benefits are small gifts or perks given to employees valued at £50 or less and can lead to tax savings as they are usually tax-free if they meet specific requirements.

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