Business News

As the Government seeks to plug certain gaps in the public purse, we are unlikely to see any change in Income Tax thresholds – despite wages and the State Pension rising.

Under the previous Government, tax thresholds were frozen until March 2028, and it remains to be seen whether this will change under the Labour Party.

This means that more people are set to be pulled into paying Income Tax on their income for the first time or pulled into a higher tax bracket – known as fiscal drag.

How does fiscal drag impact you?

The major effect of fiscal drag is that it reduces the financial benefit of any wage increase because more of your income will be subject to tax.

This leaves many individuals, whether they are employees, self-employed or company directors, no better off than if they had not received a pay increase.

It is sometimes known as a “stealth tax” because no changes are actually being made to taxation rates or thresholds.

Mitigating the impact of fiscal drag

How can you plan around fiscal drag? If you have the flexibility to restructure your income, you may consider:

• Dividends – Regardless of which tax band you are in, Dividends are taxed at a lower rate than Income Tax paid on your salary.
• Salary sacrifice – Many businesses allow employees (including directors) to sacrifice a portion of their salary in exchange for a benefit (a company car, private healthcare, etc.), effectively reducing taxable income.
• Investing in an ISA – Income or interest from an ISA is tax-free, helping you to save money for the future and minimising your tax liabilities.
• Pay into your pension – You may choose to pay more money into your pension, either to reduce your taxable income or minimise future tax liabilities, with a yearly tax-free limit of £60,000 or 100 per cent of your income, whichever is lower.
• Marriage allowance – If you or your spouse earn less than the Personal Allowance, you may be eligible to transfer £1,260 of the allowance to your partner, potentially saving up to £252 in tax.

In addition to the marriage allowance, you should ensure you are utilising all available tax reliefs, such as the personal savings allowance.

This prevents you paying tax on savings interest depending on your Income Tax band:

• Basic rate – £1,000
• Higher rate – £500

Unfortunately, there is no personal savings allowance for those in the Additional rate tax band.

Make sure to use your tax-free Personal Allowance of £12,570 before considering another tax-efficient way of receiving income.

High earners

You should also watch out if you are a Higher or Additional rate taxpayer, i.e. you earn between £50,271 and £125,140, or over £125,140 respectively.

Wage increases could pull you into a higher tax band and begin to erode your Personal Allowance if you choose to take the majority of your earnings as salary, or your business cannot pay dividends.

Remember that your Personal Allowance decreases by £1 for every £2 you earn over £100,000 – meaning that you effectively have no Personal Allowance if you earn £125,140 per year or more.

You will also be taxed at either 33.75 per cent (Higher) or 39.35 per cent (Additional) on any dividends you receive.

As a high earner, you could be significantly impacted by fiscal drag, so it is particularly important to plan ahead to avoid paying more tax than you need to.

Please contact our team today to find out how to reduce the effect of fiscal drag on your income.

For business owners and directors, dividends may form a critical element of your salary strategy and tax planning, keeping your tax liabilities to a minimum.

To extract profit tax-efficiently from your business, you may use a combination of:

• Salary – Typically set at or around the Personal Allowance of £12,570 to minimise Income Tax and National Insurance Contributions (NICs).
• Dividends – Paid to owner/director-shareholders and not subject to NICs.
• Pension contributions – You can claim tax relief on private pension contributions of up to 100 per cent of your yearly earnings.
• Director’s loans – You or a close family member receives money from your company, which may be tax-free for you as an individual, depending on how it is repaid.

Dividends can be an excellent choice for business owners because they are taxed at a lower rate than earnings subject to Income Tax.

The tax is levied depending on your Income Tax band:

• 8.75 per cent for those in the Basic rate tax band
• 33.75 per cent for those in the Higher rate tax band
• 39.35 per cent for those in the Additional rate tax band

For this reason, many business owners choose to take a relatively low salary in addition to dividends, to stay in the Basic rate band and minimise tax on dividend payments.

Could dividend taxes change?

Dividends have been a growing target for HMRC in recent years, with the tax-free allowance falling steadily from £5,000 in 2016/17 to £500 in 2024/25.

Having pledged to avoid raising taxes on income, the Government may seek to levy further tax on wealth in the Autumn Budget instead, which could incorporate dividends.

The Government has various options, including:

• Removing the tax-free dividend allowance
• Raising the rates of tax on dividends.

Should you change your strategy?

If you have a typical tax-efficient profit extraction strategy, with a low salary and dividends, then this is likely to remain the best approach to optimising your tax liabilities – but this is highly dependent on whether tax rates on dividends remain the same.

If tax rates remain unchanged, any dividends will still be subject to a lower rate of tax than if they were taken as salary, even without a tax-free allowance.

However, a rise in rates could result in a significantly higher tax liability.

In this situation, you may consider another method of profit extraction, such as making additional pension contributions if you have not used your full tax-free pension allowance.

For advice on managing profit extraction, salary and dividends, please contact our team today.

As the Autumn Budget approaches, the Government has pledged that it will “make the tax system fairer” and avoid raising taxes on working people and certain businesses.

The Government has said that it will not raise:

• Income Tax
• National Insurance (NI)
• Corporation Tax
• VAT

While Corporation Tax is not levied on individuals, the fact that the Government is not changing it may be good news for consumers.

Freezing VAT and Corporation Tax should keep a handle on price rises as businesses will not need to pass on additional costs to clients or customers.

This is a significant announcement, given that the Government seeks to make up a substantial shortfall in public finances.

What does this mean for businesses?

The budget is likely to be good news for businesses, particularly regarding VAT and Corporation Tax.

With no additional taxes to be paid in these areas, businesses may have more room to reinvest in growth – a priority for the Government, particularly in sectors such as sustainable technology.

However, some business owners may still call for the 2023/24 reductions in NI to be extended to employer NI contributions, which seems unlikely under the current Government.

How will this impact individuals?

The pledge will come as a relief to individuals who pay only Income Tax and NI, which includes most workers whose only income source is a regular salary or hourly pay.

However, individuals with additional assets such as property, private pensions, dividends or investments may reap less of a benefit.

With the Government seeking to levy additional income through taxes, these individuals will likely face an increased tax burden on their wealth through a rise in Capital Gains Tax (CGT), for example.

It is, therefore, important for those with high-value assets to engage promptly with proactive tax planning.

Want to optimise tax liabilities on your assets? Contact us today.

Taxpayers have a fundamental right to reclaim input tax, also referred to as input VAT.

However, HMRC has the authority to refuse this right under certain conditions if they can demonstrate that the taxpayer was aware, or should have been aware, that their transactions were linked to fraud.

There has been a noticeable rise in businesses from various sectors over the last year receiving notifications from HMRC denying the recovery of input tax based on these grounds.

For businesses, the risks linked to Kittel VAT include denied VAT recovery, hefty fines, reputational damage, and increased scrutiny from tax authorities.

To protect your business, here are key strategies to avoid such risks:

1. Conduct due diligence – Always verify the VAT registration and reputation of suppliers and partners to ensure they are legitimate.
2. Monitor transactions – Regularly review transactions for irregularities or signs of fraud to catch issues early.
3. Educate your team – Train your finance and procurement teams on the risks of VAT fraud, ensuring they can spot warning signs.
4. Maintain clear records – Keep thorough documentation of all transactions as evidence of your due diligence.
5. Consult professionals – Seek advice from VAT specialists to navigate complex regulations and strengthen your compliance.

By implementing these steps, your business can avoid costly fines, penalties, and reputational damage.

For tailored guidance, please contact our team.

Capital allowances are a great way to reduce your tax liabilities by claiming deductions on certain property-related expenses.

They allow you to offset the cost of capital expenditure – plant, machinery and certain fixtures – against your taxable profits, especially if you have invested in commercial properties or made major improvements.

Who is eligible to claim?

If you own property that generates income, you may be eligible to claim capital allowances.

This includes:

• Commercial landlords – If you rent out office spaces, shops, or warehouses.
• Investors – Those who purchase commercial properties for refurbishment and subsequent rental or sale.

If you are unsure whether you qualify for this allowance, please seek professional advice from an accountant.

What are the types of capital allowances?

Different types of capital allowances exist for property businesses in the UK, each with its own specific rules and requirements – because each asset serves a unique purpose.

These specific rules help ensure that businesses can fairly claim relief based on the nature and longevity of their investments, encouraging improvements and responsible spending.

Some of the most utilised allowances include:

• Annual Investment Allowance (AIA) – This allows you to claim 100 per cent of the cost of qualifying assets (like machinery and equipment) up to £1 million in the year of purchase, making it a great option for immediate tax relief.
• Writing Down Allowance (WDA) – For assets that exceed the AIA limit, the WDA lets you deduct a percentage of the remaining value each year, spreading your tax relief over time.
• Enhanced Capital Allowances (ECA) – If you invest in energy-saving equipment, you can claim 100 per cent of the cost in the year of purchase through ECAs, promoting environmentally friendly practices.
• Integral Features Allowance – This applies to certain building fixtures, such as heating and ventilation systems. You can claim capital allowances on the cost of these integral features over a longer period.
• Structures and Buildings Allowance (SBA) – This allows businesses to claim a 3 per cent deduction annually on the costs associated with constructing or renovating non-residential buildings and structures. It encourages investment in new and improved business infrastructure.
• Full expensing – Under full expensing, businesses can claim 100 per cent of the cost of qualifying machinery in the year of purchase, offering a way to write off the total cost upfront and supporting investment in business growth.

If you are not sure which of these you can claim, talk to one of our accountants. They’ll help you figure out what you are entitled to and find ways to reduce your tax bill.

How do you make a claim?

To claim capital allowances, start by identifying qualifying expenses and gathering any receipts or invoices you will need.

Then, calculate your claim and include it in your annual tax return, making sure everything’s to keep things smooth and hassle-free.

Your next steps

Whether you are an experienced or a first-time landlord, being savvy about capital allowances is key to enhancing your property’s profitability and ensuring your financial success.

By claiming the allowances you are entitled to, you can reduce your tax bill and reinvest those savings back into your property or other ventures.

If you have questions or need assistance with your capital allowance claims, our expert team is here to help.

Labour’s Autumn Budget is just around the corner (30 October) and many businesses are uncertain of what the next few years may hold for them.

The Prime Minister Keir Starmer has already warned of a “painful” Budget, with big changes to taxation, funding for public services, and incentives for investment.

For businesses, these changes can influence operational costs and market dynamics, so it is important to prepare your organisation and ensure it is agile and able to adapt.

Possible incoming changes

Labour has proposed focusing on correcting fiscal imbalances while ensuring that businesses pay their fair share towards public funding.

While they have confirmed that there will be no changes to Income Tax, VAT, and National Insurance contributions (NICs), this has sparked speculation about other areas of taxation that they may target.

We could potentially see further changes to certain tax reliefs, such as R&D Tax Credits or capital allowances.

Labour is also expected to review taxes on wealth and dividends, potentially increasing the tax burden business owners and shareholders.

The Government has expressed its interest in supporting green initiatives and social enterprises.

This could come in the form of incentives or grants for businesses restructuring their operations to align with environmental or social goals.

Is it time to restructure your business?

Given the potential tax, regulatory, and incentive shifts, restructuring your business now could provide several strategic advantages including:

Adaptability to change

Restructuring your business can enhance agility, enabling you to better respond to both challenges and opportunities.

For example, breaking large teams into smaller, autonomous units can allow quicker decision-making and better alignment with shifting market demands or regulatory changes.

Key strategies include:

• Ring-fencing key operations – By splitting core functions into separate legal entities or divisions, you protect critical assets from risk, enabling faster adaptation in response to regulatory or economic changes. This method also allows for the easier sale or spin-off of non-core divisions, should market conditions make it advantageous.
• Dynamic decision-making frameworks – Smaller, decentralised units can operate under tailored decision-making frameworks that focus on quick responses to local or sector-specific developments, ensuring that the business is better positioned to capitalise on changes.

Resource allocation

Given the way tax reliefs and incentives are changing, now is a good time to reassess your business’s resource allocation strategy.

Areas to focus on might include:

• Maximising capital allowances – With the annual investment allowance and first-year allowances available for certain capital expenditures, now may be the optimal time to invest in new equipment or machinery. These enhanced allowances can deliver significant tax savings and improve cash flow.
• Utilising R&D tax credits – If your business invests in innovation, you could benefit from Research & Development (R&D) tax reliefs. Large companies can claim RDEC (Research and Development Expenditure Credit), while SMEs may qualify for enhanced deductions or cash payments. This can offset staffing and capital costs associated with innovation and technological advancements.
• Green tax incentives – With Labour’s focus on sustainability, aligning your business with environmentally friendly practices can provide access to tax benefits such as capital allowances for energy-efficient equipment and enhanced deductions for expenditure on clean technology. Additionally, businesses operating in certain sectors may be eligible for grants and tax credits by adopting socially responsible initiatives.

Attract and retain talent

Adapting your talent strategy to meet current challenges can help your business stay competitive, particularly given potential changes to employment law and tax treatment of executive pay.

You might want to consider implementing the following:

• Reevaluating executive compensation structures – Higher taxes on executive pay could make traditional cash-based compensation less attractive. Implementing alternative schemes, such as share option plans (e.g., EMI schemes for smaller companies) or deferred compensation tied to long-term business performance, could mitigate the tax impact while still incentivising key executives.
• Offering non-monetary benefits – In light of potential changes in employment law, businesses should focus on enhancing non-monetary perks such as flexible working arrangements, wellness programmes, or professional development opportunities. These benefits can boost employee retention without raising taxable compensation, while also positioning your business as a more attractive employer to top talent.
• Career growth opportunities – Developing a clear progression path and investing in upskilling initiatives can foster loyalty and morale among employees, particularly in a competitive job market. Aligning roles with the long-term goals of your business not only improves efficiency but also boosts employee satisfaction.

What should you do next?

If your business is considering restructuring, it is better to act early.

Engaging professional advice from your accountants can help ensure your restructuring strategy is aligned with both the current state and future direction of the UK economy.

By proactively adjusting to Labour’s policy shifts, your business can be better positioned for long-term success.

If you would like advice on restructuring your business ahead of the Budget, please contact our team.

Labour shortages, particularly in the hospitality sector, are creating significant challenges for many businesses this year.

Managing your costs while trying to maintain service quality and customer relations can be a difficult balance.

Given the difficulty in hiring sufficient staff, many of you will be investing in technology to increase your efficiency.

Luckily, the Annual Investment Allowance (AIA) allows you to deduct the full cost of qualifying equipment, such as IT systems and machinery, from your taxable profits.

This includes investments in automation tools, such as self-service kiosks and advanced ordering systems, which can reduce reliance on labour for repetitive tasks.

Taking advantage of the AIA means you can potentially reduce your Corporation Tax bill while also enhancing operational efficiency.

For 2024, the AIA has been set at £1 million, providing substantial room for investments that may significantly reduce your tax liability and reliance on manual labour.

Utilising apprenticeships and employment incentives

To address staffing needs without incurring prohibitive costs, consider hiring apprentices.

Apprenticeships can provide an effective route to onboard new staff while benefiting from Government incentives.

Employers who hire apprentices under 25 years of age may be eligible for grants of up to £1,000, and the Apprenticeship Levy offers an opportunity to access Government funding for training.

The cost of onboarding and training apprentices is lower compared to hiring more experienced staff, and by shaping apprentices’ skills to meet your business needs, you can help fill existing skills gaps.

The additional funding for apprenticeship training also offers long-term benefits to both the business and the workforce.

Implementing tax-free employee benefits to improve retention

In a competitive labour market, retaining skilled staff is crucial.

To incentivise current employees, businesses can make use of tax-free benefits to enhance job satisfaction.

The trivial benefits exemption allows employers to provide benefits of up to £50 per employee without incurring tax or National Insurance.

While seemingly small, regular employee rewards under this exemption can foster a sense of recognition and appreciation.

Other options include the cycle-to-work scheme, which allows employees to purchase bicycles and equipment without tax implications.

Given the increasing costs of transportation, this can be a valuable perk that also aligns with environmental and health considerations, making it a beneficial offering for both employer and employee.

Hiring overseas workers: Financial and tax implications

Hiring from abroad can help address your labour shortages, but it also introduces additional considerations regarding tax compliance and payroll.

As an employer, you must ensure that all legal requirements for work permits and visas are met, and you should be aware of the payroll obligations involved in hiring non-UK workers, including ensuring correct PAYE and National Insurance contributions.

There are also specific allowances for supporting new hires from overseas.

For instance, the relocation allowance allows employers to provide up to £8,000 towards relocation costs without it being subject to tax or National Insurance.

Offering such support can make your job offers more attractive while still being tax efficient.

Using agency workers: VAT and cash flow considerations

Temporary workers can provide much-needed support when labour is scarce, though it is important to be aware of the VAT implications associated with agency fees.

VAT on labour costs can increase the overall cost of hiring agency workers, and while this VAT can often be reclaimed if your business is VAT-registered, it may still impact cash flow.

You should ensure that their accounting systems are set up to track VAT on agency fees accurately and that they have plans in place to manage these costs effectively.

Alternatively, ask your accountant to manage this for you.

For businesses with limited cash reserves, proactively managing these payments can help maintain financial stability during times of labour shortages.

Remember to use the Employment Allowance!

Remember, your business should be making the most of the Employment Allowance, which allows eligible employers to reduce their National Insurance contributions by up to £5,000 each year.

This can be particularly helpful when seeking to maintain employment levels or take on additional temporary staff without bearing the full cost of National Insurance.

The allowance can also be an effective way to manage overheads while maintaining or even expanding your workforce during challenging times.

If you would like more information or guidance on this issue, please get in touch with our team.

When you’re self-employed, keeping track of essential dates and deadlines can be challenging.

One crucial date to remember is 5 October 2024, which is the deadline to register for Self-Assessment. If you started working as a self-employed individual on or after 6 April 2023, you must register with HM Revenue & Customs (HMRC) by this date.

This registration informs HMRC that you will be submitting a tax return for the upcoming year. It’s a one-off requirement, so if you’ve already registered in the past, you won’t need to do it again.

It is wise to register as soon as possible to avoid any last-minute rush. Remember, your first tax return will be due by 31 January 2025, so planning ahead will give you ample time to ensure you have the necessary funds to cover your tax bill.

What if you miss the registration deadline?

If you miss the notification deadline, you might face a penalty for failure to notify HMRC.

However, if you notify HMRC after 5 October but pay your Income Tax in full by the 31 January deadline, HMRC may reduce any late notification penalty to zero.

Additional considerations

You should keep thorough records of all your income and expenses. This will not only help with accurate tax return submissions but also provide necessary documentation if HMRC requests it.

You can complete your registration online through the HMRC website, which is generally quicker and more convenient than paper forms.

Tax rules and deadlines can change, so ensure you regularly check HMRC’s website or subscribe to updates to stay informed about any changes that might affect you.

If you are unsure about any aspect of the registration process or your tax obligations, get in touch with our team and we can support you.