End-of-financial year planning for small businesses can be difficult – not least because the date of the end of their year may vary. But with 5 April, the last day of the 2020-2021 tax year, almost here, business owners need to be on top of their affairs.
The 5 April date has particular significance for personal taxation. For many small business owners, the key consideration is often dividend payments; each tax year, you can take £2,000 worth of dividends from your business with no tax liability, but unused portions of this allowance cannot be carried over to the next tax year. So, if you can use the allowance, it makes sense to do so. Above £2,000, basic-rate taxpayers pay 7.5% tax on their dividends, higher-rate taxpayers 32.5% and additional-rate taxpayers 38.1%.
Remember staff paperwork
The other priority is sorting out pay-related paperwork for your employees. P60 forms, which summarise employees’ pay and deductions for the previous tax year, must be given to staff by 31 May for everyone who was working for you on 5 April. In addition, if you give your staff benefits beyond their wages, such as company cars, you must report this to HM Revenue & Customs by 6 July and pay any national insurance contributions due by 22 July.
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As for the tax affairs of your business, the first step is to double-check when your year-end actually falls. Many sole traders and limited companies set their year-end at 5 April to align with the tax year, but you may have made different arrangements; 31 March is a common alternative.
If you are coming up to your year-end, it makes sense to review whether your business is operating in the most tax-efficient way possible. For example, making investments in the business can substantially reduce your liability to tax, thanks to the annual investment allowance. This enables you to deduct up to £1m of investment from your profit before tax is calculated; and on 1 April, the government introduced an additional “super-deduction”, with 130% capital allowances available on qualifying investments.
Another possibility is to manage your income so that some of it falls into your next financial year, if this is helpful from a tax perspective. You can delay the completion of sales of goods to achieve this effect, although the process is bit more complicated for businesses that supply services. A more radical year-end tax planning strategy is to change your accounting year-end date, which business owners are entitled to do at least once every six years. Where your profits are falling, you may be able to save tax by extending your accounting period. Or you might choose to shorten it if profits are increasing.
Finally, do not overlook additional support your business may be owed. The government offers generous tax credits for research and development work, which is defined much more broadly than many businesses realise. By some estimates there is £84bn in unclaimed tax relief currently owed to SMEs.
Businesses worried about these issues – or unsure how to optimise their tax efficiency – need advice from an accountant. The cost of accountancy services can be offset against your profits for tax purposes.
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