Turning Over a New Leaf: The Startup's Guide to Year-End Tax Planning Pt. 1
Ah, mid-autumn. The trees are transforming into brilliant hues of amber and crimson, and the brisk chill in the air hints at the winter to come. However, as we indulge in pumpkin-spiced-everything and the cosiness of wrapping up in a thick jumper, there’s another, less enchanting, matter striking fear into the hearts of startup founders across the UK: year-end tax planning.
Fear not. If you’re at the helm of a startup in the UK, we’re here to make year-end tax planning (nearly) as enjoyable as stepping on some particularly crunchy leaves. It’s an opportunity you can’t afford to miss, with chances to minimise your tax liabilities, make the most of your deductions, and ensure that you’re on the right side of the taxman. Who said tax can’t be thrilling?
Why Year-End Tax Planning Matters
Year-end tax planning isn’t just about saving money, though that’s always a bonus. For startups across the UK, it’s an opportunity to strategically position your business for the coming year. Taking the time to plan can help ensure that your company’s finances are robust, resilient, and ready to support your ambitions. Whether it’s unlocking cash flow, leveraging tax reliefs, or ensuring that you’re making informed decisions for the future, proactive tax planning is an unsung hero of startup success.
In this blog, we’ll explore key year-end tax considerations. So, grab your favourite autumnal cuppa, and let’s dive in!
Harvesting the Rewards of Employee Perks & Pay
As you know, your team is at the heart of your startup’s success – so let’s start here. While employee benefits can be a valuable tool in attracting and retaining talent, it’s essential to weigh their tax implications. Balancing immediate rewards with long-term benefits can ensure your startup remains financially sound while keeping your team motivated and engaged.
Balancing Salaries & Bonuses
While bonuses can be an excellent way to reward, they come with specific considerations for tax planning. For bonuses to be tax-deductible, they need to be accrued in the current accounting period and paid out within nine months of the year-end.
However, it’s crucial to approach this with caution. Not only can bonuses increase your startup’s National Insurance contributions, they can also attract Pay As You Earn (PAYE) liabilities, which can both potentially add to your operational costs.
Let’s Explore an Example
For example, imagine that ‘Innovate Ltd’, a startup, decides to reward its employees with bonuses due to a successful year. The company chooses to distribute a total bonus pool of £100,000 among its staff.
- PAYE Liabilities: If we assume the average tax rate for the employee receiving the bonus is 20%, the PAYE liability on the bonuses would be 20% of £100,000, which is £20,000. This amount needs to be withheld by the company and paid to HMRC.
- Employer’s NICs: Bonuses are subject to National Insurance Contributions. The current rate for employers’ NICs is 13.8% for amounts above the threshold. Assuming the entire £100,000 is above the threshold, this would mean an additional liability of £13,800.
- Employer’s Pension Contribution: With regards to pension, if we assume the company contributes at the statutory minimum rate of 3%, the pension contribution on the £100,000 bonus would be £3,000.
- Corporation Tax Relief: The total cost of the bonuses would be £116,800, including both the original bonus amount and the Employer’s NICs. This amount can be deducted from the company’s taxable profits. If the company’s corporation tax rate is 25%, the tax relief would amount to £29,200.
- Net Cost to the Company: After taking into account the corporation tax relief, the net cost to Innovate Ltd would be £87,600 (£116,800-£29,200).
As you can see, from a tax perspective, a bonus is just like any monthly PAYE payroll. Associated tax and NI costs need to be factored into your year-end tax planning.
The Pension Contributions Route
Given the implications bonuses can have on National Insurance and PAYE liabilities, you may want to consider pension contributions as a useful alternative. Not only does this provide your team with long-term financial security, but contributions made by employers to approved pension schemes also come with their set of tax-related advantages.
- Corporation Tax Deduction: Employers can deduct contributions to registered pension schemes as a business expense. This means reducing taxable profits, and consequently, your corporation tax liability.
- NICs Savings: What’s more, pension contributions are exempt from NICs, which can lead to substantial savings. Arrangements like salary sacrifices can further amplify NICs savings, with employees agreeing to a reduced salary in exchange for higher employer pension contributions, which can lead to reductions in NICs and income tax for both parties.
Share (Scheme) the Love
Share schemes can be strong motivators for your team, allowing them to reap the rewards of the company’s growth and success. When it comes to year-end tax planning, schemes such as the Enterprise Management Incentive (EMI), Company Share Option Plan (CSOP), Save As You Earn (SAYE), and Share Incentive Plan (SIP) can help you unlock valuable corporation tax deductions. Setting up and managing these schemes can be complex, so don’t hesitate to reach out for expert guidance. Feel free to give us a call if you’d like to explore the possibilities!
The Power of Employee Perks
And lastly, did you know that employee perks can actually be a tax-savvy choice? Consider offering benefits like a cycle-to-work scheme, discounted public transport passes, or electric car allowances. These not only promote sustainability but can also result in significant tax savings. What’s more, arranging health benefits such as private medical insurance or gym memberships in a tax-efficient way can enhance your team’s well-being without adding a hefty tax burden.
Let’s Talk Capital Allowances
With the Annual Investment Allowance (AIA), businesses have a powerful tool at their disposal. As of the 2022/23 financial year, you can slash up to £1 million from your taxable income, providing substantial relief for your business.
And here’s where it gets even more enticing. In a move to bolster business investment, the government introduced a ‘super-deduction’ for qualifying expenditures on plant and machinery assets made from 1st April 2021 to 31st March 2023. This super-deduction allows companies to claim a huge 130% first-year relief, that would ordinarily qualify for 19% main rate capital allowances. This means an effective tax cut of 24.7% on the actual investment amount, meaning for every £1 you invest, your taxes are cut by up to nearly 25p.
Suppose ‘Start Up Co.’, a newly established company, purchases qualifying plant and machinery costing £800,000 before April 2023, during which the AIA limit is set at £1 million. Here’s how the figures stack up for claiming the Capital Allowance:
- Qualifying Expenditure: The company invests £800,000 on plant and machinery.
- AIA Limit: £1 million for the 2022/23 financial year.
- Claiming AIA: Since the expenditure of £800,000 is below the £1 million AIA limit, Start Up Co. can reduce its taxable profits by the full £800,000 for that purchasing year.
- Tax Saving: If the corporation tax rate for the 2022/2023 is 19%, the tax savings for Start Up Co. amount to £800,000 multiplied by 19%, resulting in a huge reduction of £152,000 in corporation tax.
But there’s more! If your business is eco-conscious and considering purchasing an electric car, you’re in for a treat. When buying an electric vehicle for the company, you can claim 100% of the car’s value in the first year of purchase. This not only aids in promoting sustainable business practices, but also offers compelling financial incentives.
To delve deeper into the mechanics of AIA and for further references, take a look at the official UK government’s page on Capital Allowances.
It’s important to note that, from 1st April 2023, the super-deduction has been replaced with a new temporary allowance, known as ‘full expensing’. This permits companies to fully expense their qualifying capital expenditure on main pool plant and machinery for the subsequent three years, with the allowance applying to the actual cost of the asset, rather than the cost inflated by 30%.
Making the Most of R&D Relief
If you’re a startup diving into Research & Development (R&D), then the SME and RDEC R&D relief schemes should definitely be on your radar! With the SME scheme, you can even get a deduction of 86% of relevant costs. And if, by chance, your SME incurs a trading loss? Well, there are provisions for that too. Remember, there’s a two-year claim window, so ensure you’re on top of your R&D game and maximise these benefits.
More than Just a Lick of Paint
For building repairs and decorating your premises, here’s a year-end treat: deduct these costs from your profits. It’s a straightforward way to reduce taxable income, a wise financial move as the year concludes. So, if you’ve been considering office upgrades or fixing that leaky roof, now’s the time.
The Startup Financial Trifecta
If your startup is part of a larger family of companies, group relief can be a huge advantage. This provision allows companies within the same corporate group to transfer and offset their trading losses and profits – enabling you to share the financial burden at year-end.
However, it’s essential to understand the conditions for group relief eligibility:
- 75% Ownership: To qualify, one company must directly or indirectly hold at least 75% of the ordinary share capital of the other. Alternatively, a third company must hold 75% of both.
- Same Accounting Period: For group relief to be effective, the accounting periods of the surrendering company (the one transferring its losses) and the claiming company (the one offsetting those losses against its profits) must coincide.
- Residence: To benefit from this provision, both companies involved must either be UK residents, or, if they’re non-resident, they should be trading through a permanent UK establishment.
- Loss Availability: The losses being transferred must be available to the surrendering company, meaning they should not have already been relieved against its own profits.
- Group Continuity: Importantly, for a valid claim to be made, the companies must be members of the same group – both at the time the loss was incurred, and at the time of the claim.
If your startup has been passing around resources, assets, or services within the group, you’re dealing with intercompany transactions. The key here? Keep it fair. Transactions should be treated as if they’re between total strangers to keep HMRC content. Before the year shuts its doors, give these transactions a once-over to ensure they’re above board and properly documented.
And That Tricky Director’s Loan Account!
Now, the Director’s Loan Account can be quite useful. It allows founders or directors to temporarily borrow from or lend to the company. However, ideally, you don’t want the company owing you money – or vice versa – at year-end. If the company owes you, make sure it repays you within nine months after the year-end to avoid extra taxes. If you owe the company, try your best to repay it within the same timeframe to avoid any unexpected tax complications.
Closing Year-End Thoughts
As the end of the year approaches, and as the leaves begin to fall, remember that tax planning isn’t just an obligatory chore. It’s an opportunity to lay the groundwork for your startup’s success in the coming year. So, while you’re enjoying those crisp autumn walks and pumpkin-spiced lattes, take a moment to reflect on your financial strategy – and watch your business flourish in the seasons to come.
Stay tuned for our upcoming post on individual tax planning tips – more valuable insights are on the way!
Need personalised advice? Don’t let year-end tax planning cast a chill over the rest of 2023. Reach out to us today at Standard Ledger and book your free call with our Founding UK Director, Elliott Gaspar!