For many small and medium-sized business owners, the end of the tax year on 5th April represents one of the most important dates in the financial calendar. It’s a time when businesses review and reflect on their performance, finalise accounts and start to prepare for tax returns. For some companies this also ties in with the end of their financial year.
In the run-up to the 5th April deadline, many SME owners will be focused on boosting revenue and closing deals before the year ends. While increasing sales is important, it’s critical to look at the tax planning opportunities that arise at this time of year. Susan Perry, Cooper Accountancy recommends taking a proactive approach now to identify opportunities to reduce tax liabilities and avoid missing out on valuable allowances that might otherwise go unused before the year ends.
Review accounts before the end of the year
The best way to prepare for the end of the tax year is to ensure the accounts are fully up to date. Reconciling financial records ahead of time gives directors and business owners a clear overview of the company’s financial position while there is still time to take action.
This review can reveal where profit margins currently sit and check whether all business expenses have been 
properly accounted for. This visibility is vital when looking to see which steps can be taken to improve tax efficiency before the deadline passes.
Having this overview means business owners can start to identify any gaps or unused opportunities. This might include reviewing tax thresholds, pension contributions or reliefs that have not yet been utilised. Forward planning at this stage gives directors the flexibility to make informed financial decisions before the year closes, rather than realising missed opportunities once it is too late to act.
Understanding key allowances
To maximise tax efficiency, SME owners should take a holistic view of both their business and personal finances. There are number of key personal and business allowances available that can help reduce tax exposure if they are used effectively before the end of the tax year.
Business allowances
- Annual Investment Allowances – Companies can claim up to £1m each year on qualifying equipment and machinery, office equipment, vehicles and more.
- Research and development tax relief – Can be used for if the business is developing new products, services or processes.
- Small business Rate Relief – Reduces or eliminates business rates on any commercial properties.
- Employment allowance – Businesses may be able claim up to £5,000 per year off NIC contributions.
- Capital allowances for business vehicles – Allows businesses to deduct some or all of the value of a vehicle from taxable profits in the year or purchase.
- Pension contributions – Treated as a deductible business expense which helps reduce a company’s taxable profits.
Business owners must be aware that some of these business reliefs are only available to limited companies..
Personal allowances
- Marriage allowance– Up to £1,260 of unused allowance can be transferred to a partner if they earn under the threshold.
- Dividend allowance– Individuals can receive up to £500 in dividend income each tax year tax-free.
- Personal savings allowance– Basic rate taxpayers can earn up to £1,000 in interest without paying tax. Higher rate taxpayers can earn up to £500 tax-free.
- Capital gains tax allowance– Individuals can make up to £3,000 in profit from the sale of assets before Capital Gains Tax applies.
- ISA allowance– Up to £20,000 per year can be saved into an Individual Savings Account (ISA), with interest earned remaining tax-free.
- Pension annual allowance– Contributions of up to £60,000 per year can be made into a pension with tax relief.
- Trading allowance– Individuals can earn up to £1,000 per year from additional income sources, such as freelance work or a side project, without paying tax on that income
- Inheritance tax gifting allowance– Individuals can give away up to £3,000 each year without it counting towards the value of their estate for inheritance tax purposes.
- Rent-a-room relief– Those who rent out a furnished room in their home may earn up to £7,500 per year tax-free under the government’s rent-a-room scheme.
Reviewing these allowances in advance of the tax year deadline can help ensure that SME owners are making the most of the opportunities available to them. Looking at personal and tax positions together ensures that opportunities which could benefit both the business and its directors are not overlooked.
Balance salary and dividends
The end of the tax year is also a good time to review how directors are paying themselves. Many choose to take a combination of salary and dividends, but the balance between the two can significantly affect the overall tax position.
A director’s salary is subject to income tax as well as employer and employee National Insurance contributions. However, salaries are also treated as a business expense, which means they can reduce a company’s corporation tax liability.
Dividends, on the other hand, are paid from company profits after corporation tax has already been deducted. They are taxed at different rates compared with salaries, which can sometimes make them a more tax-efficient way of extracting profit from the business.
The most effective route depends on the individual circumstances of both the company and the director. Factors such as personal income levels, other sources of dividends and tax thresholds all need to be considered and it’s important to remember that decisions made for the business can have an impact on personal tax liabilities.
Don’t leave money on the table
As we approach the end of the tax year, it’s an important opportunity for business owners to take stock of their finances and ensure they are operating as efficiently as possible. By reviewing accounts early, directors can identify where certain allowances or reliefs could still be utilised and whether profits can be managed more strategically before the year closes.
Ultimately, careful planning now can help SME leaders avoid leaving hard-earned money on the table. It also allows them to start the new financial year with greater confidence, knowing their business is in the strongest position possible.
Susan Perry, Cooper Accountancy