Tax Planning Strategies for your Business: Maximising Deductions and Credits

24th April 2024

Investing in a strategic approach to tax planning is crucial to ensuring your business is in the best possible position to drive growth and optimise your financial resources. Tax regulations and laws can be difficult to navigate, quickly becoming overwhelming for even experienced teams.

To help you get started on your tax planning journey, let’s explore the importance of strategic tax planning and look at some of the strategies you could employ to strengthen your financial position moving forwards.

The Importance of Tax Planning in a Challenging Economic Climate

It’s no secret that businesses here in the UK have been facing challenging economic circumstances. As a robust tax planning strategy can have a significant impact on your yearly profits and how successful you are when it comes to securing meaningful business growth, investing the time into this area now could continue to provide rewards long into the future.

A considered approach to tax planning may include:

  • Utilising tax relief opportunities
  • Implementing a tax-efficient structure
  • Providing tax-efficient employee benefits
  • Effectively offsetting losses

The benefits of tax planning are numerous and include:

  • Minimising your tax liabilities
  • Reducing tax-related errors
  • Keeping up with new tax regulations
  • Saving time at the end of each financial year

Advantages of Incorporating a Company

Did you know that the structure of your business can have a significant impact on your tax planning strategy? If you haven’t yet incorporated your company by registering with Companies House, there are many advantages to doing so, including:

1. Tax Savings

Corporation tax applies to business profits, and this is charged at a lower rate than the higher income tax bracket.

2. Limited Liability

Incorporating your business also allows you to separate yourself from your business, which will offer an extra layer of protection for your personal assets.

Fundamental Principles of Corporation Tax Rates and Deductions

Starting with the April 2023 financial year, the main corporation tax rate in the UK for businesses with profits exceeding £250,000 stands at 25%, which represents a marked increase from the 19% rate which applied to the April 2022 financial year. For companies in the UK with profits under £50,000, a 19% corporation tax is typically applied.

There are a number of different ways that businesses can minimise the amount of corporation tax they are liable to pay, including:

  • Claiming research and development relief
  • Contributing to pensions
  • Claiming business expenses
  • Allowing employees to participate in share schemes

Tax-Efficient Employee Benefits

Although many changes to the taxation system have been made in recent years, there are a number of tax-efficient ways to provide benefits for your employees.

1. Pensions

Companies can claim tax relief on contributions made into a pension scheme that are not deemed to be part of an employee’s taxable income. It is important to emphasise here that annual limits do apply and relief will not apply if contributions are deemed to be excessive.

2. Share Schemes

Shares are often used to reward employees, allowing them to benefit from the success enjoyed by the company as it grows. Shares schemes generally have low associated initial costs for both employer and employee, however they can provide long-term income and capital benefits and can help companies to retain high-performing employees.

Generally, income tax applies on the cost difference between a share’s market value and the price an employee pays. However, companies receive a corporation tax deduction should any taxable benefit arise.

3. Parties

Employers may hold a tax and national insurance exempt annual event, such as a summer BBQ or a Christmas party. However, it must be for all employees and the cost-per-head must not exceed £150 including VAT.

Opportunities in Research and Development (R&D) Tax Credits

R&D tax relief is a government scheme designed to provide support to companies that are working on innovative projects in technology and science. Tax relief can only be claimed on projects which aim to benefit the field as a whole, and not just your own business.

By 2027, the government wants levels of R&D investment in the UK to equate to 2.4% of GDP. To achieve this ambitious goal, the RDEC R&D and SME schemes were merged and came into effect on 1 April 2024. The new scheme mostly follows the principles of the original RDEC scheme, however it has been enhanced by a few elements brought in from the SME scheme.

Tax Incentives in Investment Schemes

There are other investment scheme opportunities that come with tax incentives, which may be worth exploring.

1. The Seed Enterprise Investment Scheme (SEIS)

Through SEIS, investors can secure a 50% initial tax relief award on all investments up to the value of £100,000, plus Capital Gains Tax exemption for any gains on shares purchased via the scheme. There are strict eligibility criteria for companies, which are required to have fewer than 25 employees and hold under £200,000 worth of gross assets.

2. The Enterprise Investment Scheme (EIS)

Investors are eligible to claim income tax relief of 30% on all EIS investments up to the value of £1 million in each tax year. This government scheme has been in place for many years and is designed to help small companies that are viewed as being high risk for investors to secure valuable financing.

When navigating investment schemes and other tax-efficient strategies, it is important to seek support from knowledgeable professionals to ensure they are right for your business. AK Tax provides expert tax planning support services that are tailored to the unique circumstances and financial goals of each business we work with, offering bespoke plans to ensure your finance and tax strategies are working hard to support the future growth of your business.