MAY 2024 AFTERMARKET 13 www.aftermarketonline.net (NICs) apply to salaries for both the company and the recipient. Meanwhile, dividends are not subject to NICs and the recipient pays lower tax rates than they do on salary, so there is a balancing act between the two. Consideration of NICs is also important as they provide for future state pension entitlement along with other state benefits. For this reason, a typical approach is to pay salary equivalent to at least the Secondary Threshold (£9,100) to ensure a year ‘counts’ for state pension contributions, but probably no more than the personal allowance (£12,570) above which PAYE starts to be incurred. Claim any business costs paid personally While ideally all business expenses should go through the books, sometimes this doesn’t happen. Sole practitioners and partnerships can claim tax relief for business expenses paid for by the owner. The most common examples are the owner using their own vehicle for business purposes, or using their home as a place of work. Costs associated with both can be claimed against the business profits, reducing the tax payable. Tax relief can be claimed on a simplified basis – mileage at 45p per mile for up to 10,000 business miles per year, and 25p thereafter, whilst use of home as an office can be claimed at between £10 and £26 per month depending on the number of hours worked from home. Alternatively, the actual costs of the business use of car and home can be calculated as a proportion of the total running costs in the year. Tax-efficient benefits for staff HMRC is known for doggedly ensuring that individuals and organisations pay the right amount of tax in a timely fashion. However, it also has policies and regimes in place to help taxpayers pay less through targeted allowances and exemptions. Non-cash remuneration – benefits - from a company can be highly taxefficient. This won’t apply to owners of sole practices or partnerships but is an option for any employees they take on. Certain benefits in kind such as employer pension contributions, providing one mobile phone per employee and free staff canteens can be provided tax-free to employees and directors. Staff events such as an annual Christmas party or other annual function can also be laid on tax-free as long as the total cost for all events in the year does not exceed £150 per head. The costs of these perks can also be claimed against the company’s taxable profits. Electric cars can no longer be provided tax-free to employees, but until April 2025 they only attract a benefit in kind charge based on 2% of the list price. So a £50,000 electric car provided to an employee or director will result in a £200 annual tax charge for a basic rate taxpayer, or £400 for a higher rate taxpayer. If the business leases the car, those costs can be claimed when calculating the business’ taxable trading profits. If the business buys the car outright, the full purchase cost can be claimed in the year of purchase as long as this is before 31 March 2025. Electric cars are also tax-efficient for unincorporated businesses, which can claim the full cost of purchasing before 5 April 2025, or ongoing leasing costs. Both are subject to a restriction for any private use of the vehicle. Salary sacrifice pension contributions remain tax efficient. If an employee gives up the right to part of their gross salary, the employer can pay that amount into a pension scheme on the employee’s behalf, saving tax for the employee and NIC for both the employee and the employer. Also, ‘trivial benefits’ valued at up to £50 each can be provided tax-free to employees as long as they are not a reward for services and are not cash or cash-equivalent vouchers. Directors are generally limited to £300 of trivial benefits per tax year. Claim Capital Allowances The cost of buying capital items (such as machinery, furniture or vehicles) doesn’t count as an expense when calculating taxable profits. Instead, Capital Allowances can be claimed in respect of these assets, both for limited companies and unincorporated businesses. For instance, the Annual Investment Allowance (AIA) allows up to £1m of expenditure on eligible items (excluding cars) to be deducted from trading profits each year. Until 31 March 2026, limited companies can also benefit from “full expensing”, which allows unlimited corporation tax relief on eligible capital expenditure. In practice, this will only be of benefit where qualifying purchases in a year exceed the £1m AIA limit. Capital Allowances need to be claimed each year. Doing so will generally reduce the tax payable, but if a business makes a loss, it is often better not to claim capital allowances that year. This will increase the tax relief available for capital items in later years, once the business starts to make a profit. Think long term Where the owner wants to sell their business they’ll need to think about an exit strategy. A Capital Gains Tax (CGT) charge is likely to apply, with rates of up to 20% on the growth in the business value. If the owner structures their business so it qualifies for Business Asset Disposal Relief they could access a 10% CGT rate on up to £1m of capital gains. The planning required depends on whether the business is unincorporated or run as a limited company, and professional advice is crucial. Owners may not envisage running their business forever and should think about Inheritance Tax (IHT) in case the worst were to happen. A trading business can often qualify for 100% relief from IHT thanks to Business Property Relief (BPR), which can provide a huge tax saving whether they plan to pass the business on during their lifetime or when they die. Get tax right first time The incentive to minimise tax bills is clear, but it’s vital that the business pays the correct amount of tax – no more and no less than required. It’s best to avoid tax schemes that sail too close to the wind as these can lead to HMRC investigations, sleepless nights and unexpected tax bills; the old adage of “if something seems too good to be true, it normally is” is so true when it comes to tax. It’s vital that the business pays the correct amount of tax – no more and no less than required ”
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