Top tax tips and financial planning for business

This continuation from our tax planning blog is primarily based around financial planning for business in the 2021-2022 tax year. Again, it is general information with tips to gain tax advantages, and is for reference only. It is not provided as bespoke advice or guidance for your individual business.

If you require more detailed information and calculations in relation to any of these tips, our team of Independent Financial Advisors here at Simpson Financial Services can assist with financial recommendations to meet your individual needs and those of your business.

1. Make sure you declare all COVID-19 business support – if you are self-employed and received Self-Employed Income Support Scheme Grants, Local Council Grants, or furlough payments for your employees, remember to include this income in your 2021-2022 tax return. Working through your tax return accurately, and effective financial planning for business such as this, could help you avoid a potential HMRC compliance check!
2. Reduce Capital Gains Tax – if you own a trading company, by spreading the shares between you and your spouse, you could reduce CGT payable on a future sale. Providing you both meet the 5% shareholding test for at least two years before the sale and are either a Director/Company Secretary or employed by the company, you should both qualify for business asset disposal relief on any gains made through the sale. 10% of CGT relief is applied to the first £1m of gains made on all qualifying assets during each person’s lifetime.
3. Retirement planning and asset disposal relief – if you want younger colleagues to buy your company shares, but they do not have the cash to do so on your retirement, the company could buy your shares and then cancel them, leaving the remaining shareholders controlling the company. This means you receive the cash, and provided certain requirements are met, the same CGT relief applies as tip two (above).

You can also carry forward and utilise unused pension allowances from the three previous tax years to cover pension contributions greater than the current year’s annual allowance.

4. Don’t forget the £1,000 trading allowance – many new business owners assume they must declare all income from the set up of their business. You can actually receive up to £1,000 tax-free income without having to declare to HMRC. Once the business is generating more than £1,000 of sales in a tax year, it must be registered with HMRC, to avoid penalties.
5. Choose the most tax-advantageous structure for your new business – operating as a company could currently provide the most advantages from a tax and financial planning perspective, as corporation tax is just 19%, compared to income tax rates of up to 45%. A company can be used to hold undrawn profits and make tax-efficient pension contributions. Conversely, if you are anticipating losses in the early years of your new business, you can use those losses against other income (if you start the business as a sole trader or partnership). The amount of tax due will depend on how you draw funds from your business, and how much money you use for personal use.

N.B. It is worth getting ahead with your financial planning for business and seek professional tax advice before setting your new business up, as the main rate of corporation tax is due to increase from April 2023, so could impact the tax efficiency of operating as a company versus sole trader/partnership.    

6. Don’t miss your VAT registration requirement – when your business exceeds £85,000 turnover, you must register for VAT by the end of the month following the month in which your turnover exceeds the threshold. Following registration, you must apply VAT to all sales (apart from those which are VAT exempt), retain your VAT records in digital format, and submit digital VAT returns to HMRC.  
7. Offset any trading losses - the COVID pandemic caused many businesses to experience unexpected trading losses, so you may be able to generate a tax refund by setting off losses against past years’ profits on which you have already paid tax. Also, as an unincorporated business, you can set your loss against total income for the tax year in which the loss arose and/or the previous year.

Also, as a temporary measure, relief for trading losses made in 2020-2021 or 2021-2022 can be extended to offset against trading profits made in the three previous tax years.

You should be aware of the cap on how much loss can be offset against total income - the higher of £50,000 and 25% of your income for the year.

Looking after your employees

8. Salary sacrifice schemes can bring tax advantages – if set up correctly, salary sacrifice schemes involving pension contributions, childcare, low emission cars and cycle to work schemes (see later tips) can benefit both employee and employer.

We recommend you seek more detailed guidance in this respect to ensure you have the most up to date information to assist with effective financial planning for business, tax advantages, and National Insurance Contributions.

9. Provide electric or low-emissions company cars – for the 2021-2022 tax year, all-electric company cars can be provided to employees with a taxable benefit of just 1%. The taxable benefit of hybrid vehicles depends on their electric-powered range, and on whether they were first registered before or from 6th April 2020.

As an employer, you can claim 100% first year capital allowances for the cost of new wholly electric vehicles purchased from 1st April 2021.

10. Provide electric charging points at your business premises – you can claim 100% deduction for the cost of installation of the charging point.
11. Help employees work from home by paying a tax-free allowance – once a formal arrangement is in place, employers can pay £6 per week (£26 per month) tax-free and NIC-free to employees who regularly work from home. It does not apply where the employee simply chooses to work from home.

You can also reimburse the cost, without tax implications, for any equipment your employees purchase to enable them to work from home.

Where you have not paid the working from home allowance to your employee, they can claim the same amount of £6 per week as a deduction in their tax return, or as a standalone claim from HMRC. Claims can be made up to four years after the end of the tax year.

12. Pay for employee pensions advice – you can pay for up to £500 tax-free of individual pensions advice per employee in any one tax year for any employee reaching retirement age, or if they are in ill health. You could also provide pensions advice to all other employees as part of their employee package.
13. Provide an annual heath check and eye test for your employees – medical treatment paid for by an employer is generally a taxable benefit, but there is an annual exemption of up to £500 where you fund medical treatment which will assist an employee’s return to work following sickness or injury.

The health check is tax-free, as is the eye test if the employee uses a computer or display screen as part of their job. Any corrective lenses required to use that equipment can also be provided tax-free.

14. Supply your employees with one tax-free mobile phone each – provided you, the employer, own the phone and contract with the telecoms supplier, mobile phones are a tax-free benefit to employees.
15. Offer a subsidised bicycle – the employees’ cycle to work scheme is encouraged to maintain environmentally friendly alternatives to public transport, and to reduce the volume of individual vehicles on the road. You can lend bicycles and associated safety equipment to employees to commute to work and for other private journeys. The bikes and equipment can be included within a salary sacrifice scheme (see tip 7). The employee can then buy the equipment at the end of the loan period for a significantly discounted price, and there is no limit on the value of bicycle that can be provided.  
16. Use your own car for business journeys – you can claim a tax-free and NIC-free business mileage allowance of 45p for the first 10,000 miles, and 25p for any business mileage over and above that threshold. If you pay your employees for business mileage at a lower rate, they can claim the difference from HMRC through their online personal tax account.

If you work for yourself, you can use these mileage rates to calculate the cost of business journeys in your own car, which is often easier than calculating the business proportion of the entire vehicle running costs.  

Keep records of your business journeys, including the distance and reason for the journey. And encourage your employees to do the same, so expenses payments will always be detailed and accurate. Under normal trading circumstances, it can also give you a good indication for your following year's financial planning for business and tax return preparation.

Financial planning for business and tax advice from Simpson Financial Services

Our team of experts here at Simpson Financial Services will assist with all aspects of your financial planning for business, ensuring you are making the most of tax allowances, receiving benefit and tax relief where it is applicable, and providing the best employee experience for your staff. Contact one of our expert team today to arrange your business and financial portfolio review. We know and understand the financial jargon, compliance, and regulations, so you don’t have to, and we can help you avoid any unnecessary HMRC penalties too!