10 Year End Tax Planning Recommendations For SMEs

You have the opportunity to structure your small business finances in ways that preserve additional of the wealth that you create. This takes advance planning. Do not miss this chance.

To aid, here are 10 pre-year end tax planning tips that锟絜ntrepreneurs will need to be actively taking into consideration to reduce corporation tax, income tax and national insurance costs:

1. Don't pay corporation tax at the highest rate of 29.75%. Calculate your full year budgeted profits as soon as doable so that you plan around this rate. If you're a standalone firm and your estimated taxable profits exceed ?300,000 (but are much less than ?1.5m) then you fall into what's called the corporation tax 'marginal rate.' This just isn't a fantastic location to be. This rate is锟絟igher than the rate of tax applied to substantial organizations (with profits in excess of ?1.5m) who pay tax at 28% and considerably greater than the 21% rate your business would otherwise锟絧ay in the event you kept锟絧rofits below the marginal band. If this锟絘pplies to锟統ou, then you should look at tax planning ideas to reduce your corporation tax payable - see further below.


2. Make a pension contribution from your provider into your (and possibly your spouse's) pension fund. I am not going to go into the pros and cons of pensions and the detail of the lately introduced (and hideously complex) anti-forestalling provisions that at present apply for 'super earners' (broadly those with personal income of ?130,000+), suffice to say that pensions can play an critical role in year end planning for owner managed companies. The benefit of pensions is that income tax relief is received at the individual's highest rate of income tax. Specific restrictions apply for 'super earners' and new rules is going to be coming into force from April 2011, nevertheless, where implemented carefully, pension planning enables for锟絘 corporation tax deduction within the provider and no income tax or national insurance payable by the owner managers. Pensions can also be an crucial lever in managing the company taxable profits e.g. if hovering above the ?300,000 standalone firm profit watershed. And do not forget you must锟絧ay the pension contribution by the year end in order for it to be tax deductible within the organization in that period - so don't leave it to the last minute!


3. Optimise the tax on your remuneration. Typically, a modest salary (inside the personal allowance - so no income tax or national insurance is due) will have been paid during the year with standard dividends to cover living expenses. Spouses, who ideally take锟絘n active锟絩ole in helping run the company, can obtain a small salary and dividends (subject to shareholdings) to maximize the use of each husband and wife individual tax allowances. With the year end approaching, now will be the time to consider whether or not a final bonus or dividend will need to be awarded depending on readily available distributable profits, taxable profits and how much requirements to be left in the business for future reinvestment etc. There are typically many factors to take into account in producing final awards of money from the business, therefore it really is critical to crunch the numbers. Typically, a dividend are going to be essentially the most tax efficient indicates of extracting profits for most organization owners (up to the ?150,000 individual income limit and 50% additional tax rate - see further below). Care should be taken in awarding dividends to spouse shareholders as HM Revenue & Customs still have their eye on husband and wife organizations despite having lost a landmark case on this issue related to maximising both spouse's income tax allowances. Some demonstrable activity within the business enterprise by each spouses is therefore recommended to mitigate this risk.


4. Watch the 60% marginal income tax rate for income over ?100,000. Total personal income of ?100,000 is a new watershed for company owners as income received between ?100,000 to ?112,950 attracts a marginal rate of 60%! This is due to the personal allowance being phased out for income above ?100,000. So if your total remuneration package is likely to be around this area, you might be well advised to limit your income to ?99,999 to avoid this horribly expensive marginal rate.


5. Watch the 50% additional rate for 'super earners'. For those successful entrepreneurs with earnings in excess of ?150,000, getting the right balance of锟絩emuneration is even extra crucial as income tax is levied at 50%锟給n salary or bonuses compared to 36.1%锟給n dividends?(a 25% increase in tax on salary income is matched (or not?!) by a 44% increase in dividend tax rate - work that one out?!). So rather than take a dividend from the company beyond ?150,000 total income, company owners could consider taking a loan from the organization as well as the provider paying the due tax at a rate of 25% on the loan - something akin to what the shareholder would have paid锟給n a dividend. Note that there could also be benefit in kind tax charges where no interest is paid on the loan but this could still work out to be the cheaper overall option.


6. Optimise the timing of dividend and bonus payments for cashflow and tax rates. Dividends and bonuses are taxed on business enterprise owners on a receipts basis. If your income is already high for the 5 April 2010/11 tax year then you could defer paying out a dividend until 6 April 2011 to ensure that it falls inside the following year's tax allowances and limits. Also, you can accrue a bonus within the 31 December 2010 accounts and don't have to physically pay it until 30 September 2011 but you still receive the corporation tax deduction upfront. This gives a useful cash-flow advantage plus the bonus timing is applicable for all employees i.e. not just enterprise owners.


7. Plan your spend on capital items to get tax relief quicker. Expenditure on computer equipment, desks, chairs etc attracts a write off against tax up to ?100,000 spend per year. This reduces to ?25,000 from April 2012. Make sure you bring forward any expenditure to reduce your taxable profits especially if the provider profits are hovering around the standalone organization ?300,000 mark.


8. Get tax deductions now for provisions against stock and debtors etc. Think about the valuation of any stock or debtors at the year end and make specific provisions where the likely recoverable value is less than the original amount recognised. Provisions against specific items (on a line-by-line basis) are tax deductible for corporation tax purposes.


9. Claim loss carry backs as soon as possible to get refunds. In the event you have a forecast tax loss then you can carry this loss back to obtain a refund from HM Revenue & Customs of the corresponding amount of tax suffered within the preceding accounting period. You may wish to get your skates on with the year end work to ensure that you can promptly file the accounts and tax return and get the cash back as quickly as achievable.


10. Don't get time barred from lucrative tax incentives. Review readily available tax incentives such as R&D tax credits, capital allowances on fixed asset expenditure, loss carry back claims etc as the majority of such tax breaks have a 2 year time limit for you to be able to claim them with HM Revenue & Customs. So, for example, 锟絤any available tax incentives for the year end to 31 December 2008 will probably be time barred from 1 January 2011.