As business owners, the amount of tax you’ll have to pay is going UP in April.
I’m sure you don’t want to pay any more tax than you absolutely have to (me either) – so today, we’re talking about what you can do right NOW, to potentially save yourself a whole chunk of cash!
It’s Corporation Tax that’s going up, so this is 100% important to know if you’re a Limited Company.
If you’re currently a Sole Trader, it’s still worth reading on, because you’ll see how becoming a Ltd company might actually be a more tax-efficient option for you moving forward.
In a nutshell, Corporation Tax is a tax on the profit your Limited Company makes, during any given accounting year.
Your accounting year can start and end in any month you like. Some people run their accounting year from January to December; others from April to March (mine runs from August to July).
Whenever you choose to run your accounting year, your Corporation Tax is payable 9 months and 1 day after your year ends.
Just to be very clear here – this is separate to your personal tax return that’s due in January!
You and your Limited Company are two very separate entities. You pay Corporation Tax on the profit your business makes, and then personal tax on the money you pull out of your business.
If you don’t draw all the profit out of your business – leaving some to reinvest – then you don’t pay personal tax on it, which is why becoming a Limited Company rather than being a Sole Trader can be much more tax efficient, depending on your personal circumstances.
I think it’s easiest to look at some numbers here, so you can see what the changes to Corporation Tax actually mean for you.
Let’s say before April 2023, you made £100k in sales during your accounting year.
You spend £30k on costs.
You make £70k in profit.
The Corporation Tax you’d pay is £13,300 – which is 19% of your £70k profit.
What happens AFTER April 2023 is that they’ve introduced a new scheme, where they’ve put up the rate of Corporation Tax, and added in a few little things to help business owners with lower turnover:
- For your first £50k of profit, you still pay 19% (which is good news!)
- If you make over £250k profit, you pay a new standard rate of 25%
- And then in between £50k and £250k of profit, there’s a new sliding scale of marginal relief.
So what does this actually mean for you? And WHY do you want to do something about it now?
Well – I’m not going to go into the exact calculation here, because it’s too complicated to really explain in a blog (basically you take your total profit, multiply by 25%, subtract your profit from the £250k threshold and then multiply by 3/200, the fixed marginal rate multiplier. See what I mean?!)
But the key thing here is that if we go back to that example of £70k profit, you’ll pay £2,500 MORE in tax after April 2023, than you did on the same profit the year before.
It works out at 21% tax overall, rather than 19%. Which might not sound like a massive leap but in reality is a chunk of cash, especially as you scale and grow your business!
If you have a bigger business – say with £130k of profit – you’ll be paying £6,000 MORE in tax (it works out at 23% overall, which I think we can agree is pretty hefty).
At £250k of profit, you’d be paying £62,500 in tax (a 25% tax rate overall).
So what can we do?
The first thing is to make sure that your income and expenses are recorded accurately.
I know that might sound obvious! But if you want to keep your tax bill down in the most ethical way possible, then you need to look for ALL the legitimate ways to reduce your profit.
This means keeping receipts for everything you spend out on, so your accountant can maximise every single allowance available to you – including the ones you might not even know about – so you don’t end up paying a penny more in tax than you need to.
This is the real value of having a great accountant, because the list of stuff you may be able to claim for to minimise your tax bill is pretty extensive:
- Travel costs to networking / training events
- Hotel rooms and meals on overnight trips
- Car hire
- Use of home office, if you work from home
- Training / mentoring / coaching
- Relevant books
- Uniform / branded workwear
- Property insurance
- Insurance of office equipment
- Legal costs
- Staff Christmas party (or other annual event)
- Catering for events
- Trivial gifts (up to 6 x £50 a year)
- Annual eye test
- Sponsorship opportunities
- Private Healthcare – P11d Benefit in Kind
- Death In Service cover for employees
- Payroll Insurance
- Directors Pensions…
The list goes on!
Obviously many of these can be pretty complex and need organising properly, which is where having a brilliant Financial Adviser comes in – especially when it comes to the various insurances and Directors Pensions (I regularly make and save my clients way more than they invest in working with me!).
And then it’s about finding the MOST tax efficient way to get your money out of your Limited Company and into your personal bank account, for your personal use.
There are so many ways you can do this, like drawing a smaller salary and taking bigger dividends, especially if you don’t need to spend all the profit you’ve created.
The big opportunity here is for your Directors Pension.
I know pensions might not be the most glamorous thing – and they’re certainly not the be all and end all, for us business owners who create wealth and assets in a multitude of ways.
BUT if there’s going to come a time down the road where you want to work less hours or reduce the number of clients you work with, then a pension is an excellent way to fund the gap and still have the lifestyle you want.
If you’ve got profit sitting in your business at the end of year – and you don’t want (or need) to pull it out and pay personal tax on it – then putting it into your pension could be a very smart thing to do! To both save for the future AND reduce your tax bill now.
Basically it’s a means to extract your profits in a super tax efficient way!
It’s such a big opportunity because not only can you put up to £40k per year into your Directors Pension (without it being taxed on the way in), the ‘Carry Forward’ rule means you can effectively roll your £40k allowance over for 3 years.
Which is great news if your business is growing fast, and good to know for the future even if you’re not creating that kind of profit just yet.
Again, if we go back to that example of making £70k profit before April 2023:
- £70k profit = £13,300 in tax
- If you put £20k of this profit into your Directors Pension, your profit is now £50k…
- Meaning your tax bill drops to £9,500, saving you £3,800 in Corporation Tax!
And it gets even BETTER.
Put £40k into your Directors Pension right now and you save £7,600 in tax…
Put £40k into your Directors Pension AFTER April 2023 and you save at least £10,600 in Corporation Tax!
Even if that level of investment feels a way off right now, every little helps. What many people do is pay an affordable amount into their Directors Pension every month, and then chat with their accountant a couple of months before their year end, to see how much of a lump sum they can afford to put in (up to the £40k limit).
Acting now CAN save you £21,200 next year – even if you can’t afford to invest £40k right now – because the Carry Forward rule means you’ll still have access to that allowance, as your business grows. But you need to act NOW because for this to happen, you’ll need to be a member of a registered pension scheme during those years (even if you’re not paying into it!).
This is the wonder of working with a financial professional, who can guide you in the right direction and make sure you’re not missing a trick with your money and growing your wealth.
It’s all about acting at the right time, in the right way, to maximise your hard-earned cash!
If you know this isn’t your area of expertise, the good news is that it IS mine and I can help you with all of this. As both an award-winning Financial Adviser (with 15 years’ experience) and a Money Coach, I specialise in supporting women in business to manage your money, grow your wealth and create the life of freedom you really want.
There’s loads of ways we can work together – including my flagship Asset Accelerator™ programme, which begins with a deep dive 1:1 Strategy / Planning Session, where we can really get to grips with all this stuff for you (and SO much more).
Until next time,