2024-25 tax planning for owner-managed businesses

The Spring budget statement announced on 6 March 2024 was a bit of a shock for accountants due to some bold statements regarding national insurance cuts and abolition of furnished holiday let reliefs but without the detail needed to plan appropriately. Apart from the NI cuts which unfortunately do not extend to employer national insurance, there is no change in thresholds and reliefs which creates fiscal drag and brings more individuals into higher rate tax.

Living in Scotland is even more taxing (excuse the pun!) due to the introduction of a new rate of tax for high earners -Scotland’s ‘progressive’ tax system now has 6 rates of tax for us all to get our head around!

The two rates of tax for Corporate Tax remain and this is not good news for owners who have more than one limited company as this impact the thresholds for the small companies rate. The change in corporation tax rates remains an administrative burden on owner-managed companies and their accounting advisers.

It makes tax planning more complex as there are knock on effects in terms of different taxes (corporation, employment and personal tax) which advisers must explain to you .

Lothian Accounting uses a customised approach in terms of tax planning and will highlight opportunities for you to consider in terms of reducing the corporate tax burden and what impact this might have on your personal tax situation and PAYE/NI as well.

Key Tax changes from the Spring Statement affecting owner managed companies and sole traders

• Corporation tax rates remain as follows:
  • 19% on annual profits up to £50,000
  • 25% where annual profits are above £250,000
  • Marginal relief available for companies with profits between £50,001 and £250,000
  • The marginal relief effectively works out at those companies being charged 19% on £50,000 of profits and then 26.5% on profits between £50,001 and £250,000
  • If profits are over £250,000 all profits are charged at the 25% rate
• Associated companies are relevant as they will reduce the threshold at which smaller profits rate of 19% is paid e.g. 2 associated companies mean smaller profits threshold is £25,000
• The annual investment allowance on qualifying assets will be permanently set at £1 million
• Companies can claim 100% tax relief on qualifying new main rate plant and machinery investments (i.e. from from 1 April 2023 until 31 March 2026) in addition to AIA
• Employment allowance remains at £5,000 p.a.
• The threshold for paying employee National Insurance remains at £12,570,
• The threshold for paying employer National Insurance is lower and remains at £9,100 p.a.
• The Class 1 National Insurance rates have dropped back to 8% for employees from 6 April 2024 but employer National Insurance remains at 13.8%
• Class 2 National Insurance is abolished for businesses with profits above £12,570 and Class 4 rate is cut to 6% from 6 April 2024
• Dividend allowance has reduced to £500 from 6 April 2024.
• Dividend tax rates remain the same as for previous two years (basic rate at 8.75%, higher rate: 33.75% and additional rate: 39.35%)
• VAT threshold has increased to £90,000 from 1 April 2024 (deregistration threshold to £88,000)
• The basic rate tax threshold in England, Northern Ireland & Wales and Scotland remain the same as for the last 3 years (i.e. no inflationary increase). Scottish top rate of tax has again increased by 1 percentage point and there is a new advanced rate. More details are given in the table below

So what needs to be considered?

• Owner managed companies need to look at the balance of taxes -corporation tax, employment and income (personal) tax and decide what their tax planning aim is: is this to reduce overall tax? If so, this will change depending on profit levels so forecasting profit is very important
• The directors can produce their own profit forecast or ask for assistance with this from us
• Is having a qualifying year for National Insurance for state pension purposes important and are NI tax credits already available? If yes, and no tax credits are available, the director must be paid a salary just above the primary threshold which will result in a small amount of employee National Insurance being paid
• If company profits are forecast below £50,000 or above £250,000, then tax planning is more straight forward (assuming no associated companies)
• Does the company have one or many directors?  If many, then the employment allowance will cover employer national insurance payments  (as long as the directors are paid above the secondary threshold for Employer National insurance).
• Does the company owner have a spouse who has an unused portion of basic rate allowance? Is the spouse involved in the business and could therefore be paid a salary?
• There are family law considerations here but a husband and wife may wish to split shareholdings to maximise use of basic rate thresholds
• Owner managed companies should ensure they are aware of the tax treatment of company expenses such as working from home allowance, staff entertaining costs, staff travel & subsistence costs, capital allowances on assets, purchase of 100% electric vehicles or business vans etc. so these are fully claimed. This is where an adviser adds value to you

How can owner managers plan the most tax efficient strategy?

Sole director companies (company profits up to £50,000) 

• For 2024-25 a sole director should pay a salary just over the primary National Insurance threshold of if a qualifying year for National Insurance is important for state pension. This equates to £1,050 per month. If state pension is not a concern, then a lower salary of £9,100 p.a. is appropriate
• If the sole director has other earned income, this and company forecast profits need to be taken into account when setting a suitable company salary
• Then withdraw any further cash from the company via dividend -the dividend is taxed at basic rate (8.75%) or higher rate (33.75%) after the dividend allowance of £500
• There will be National Insurance to pay in total of £485.40.  By paying National Insurance there will be a qualifying year for State pension.
• There will be a small amount of income tax to pay on the salary that exceeds the tax free allowance: £30 salary at 20% tax = £6
• If the income tax payable as a result of dividend income exceeds £1,000,  payments on account will need to be made in January and July of each year which have a cash flow impact in the first year of making payments on account. This is because there is a switch to HMRC collecting income tax in advance as opposed to arrears.

Sole director plus employee(s)) (company profits up to £50,000)

Where the company has a sole director and shareholder but also has employees (earning above the secondary National Insurance threshold), the director should be remunerated with a £12,600 annual salary and further profits extracted by way of dividend, as long as the director does not have other income classed as earned income (which would be subject to the Scottish income tax rates).

As employment allowance is available, the National Insurance to pay will be employee NI only of £2.40 per employee paid at £12,600, plus the small amount of income tax as stated in the above section.

Companies owned by  multiple directors (or director plus employee(s)) and with profits over £50,000

For companies owned by two or more directors or companies with profits between £50,000 and £250,000, the more complex income tax system for Scotland and also the change in corporation tax rates from 1 April 2023 now means tax planning must be done specific to their particular personal circumstances.

Where a company is owned and managed by more than one director, existing sources of income (e.g. rental property, investment income) need to be considered for each specific director and, if relevant, their spouse and this may have an influence on how to set salary and dividend payments for the company for 2024-25.

Furnished Holiday Lets (FHL)

Key changes that will arise from 1 April 2025 as a result of abolishing the FHL scheme:

• No longer a trading activity and therefore will not be treated as pensionable income
• Capital allowances on plant & machinery, furnishings and integral features will no longer be claimed when first furnishing a holiday let but replacing these items can be claimed as an expense
• There is uncertainty over what happens to written down capital allowances and unused trading losses from a FHL business from April 2025
• Business asset disposal relief on the sale of a holiday let that has been owned personally will no longer be available -there will be an anti-forestalling rule to prevent access to capital reliefs through unconditional contracts from 6 March 2024. The detail of this is still to be confirmed
• For holiday lets owned individual or jointly rather than through a Limited company, there will no longer be flexibility in terms of sharing profits. Profit shares will follow the legal title to the property or, in the case of a married couple be automatically shared jointly

2024-25 Relevant Tax rates

A summary of relevant tax rates for Scottish registered companies in 2024-25 is shown below:

	£
Personal allowance	12,570
Scottish starter rate	2,306 + personal allowance
Scottish intermediate rate threshold (for earned income not savings income)	28,786 + starter rate & personal allowance = 43,662
Scottish advanced rate (for earned income not savings income)	Total earnings between 75,000 and 125,140
UK-wide basic rate threshold (for savings income e.g. dividends)	37,700 + personal allowance = 50,270
UK-wide top/additional rate threshold	125,140
Higher income benefit charge	Gross taxable income over £60,000
Class 1 & 4 National Insurance primary threshold and rates	12,570 (8% Class 1, 6% Class 4 up to £50,270 profits & 2% over this amount)
Class 1 National Insurance secondary threshold (& employer National Insurance rate)	9,100 (13.8%)
Dividend allowance –nil rate	500
Dividend tax rate –basic	8.75%
Dividend tax rate –higher rate	33.75%
Dividend tax rate -additional rate (dividends over £125,140 if no other income)	39.35%
Scottish starter tax rate (earnings up to £14,732) *	19%
Scottish basic tax rate (earnings from £14,733 to £25,688) *	20%
Scottish intermediate tax rate (earnings from £25,689 to £43,662) *	21%
Scottish higher tax rate (earnings from £43,663 to £75,000	42%
Scottish advanced tax rate (earnings from £75,001 to £125,400) *	45%
Scottish top tax rate	48%

* includes personal allowance of £12,570 on which no tax is paid. If earnings are above £100,000, the Personal Allowance will reuce by £1 for every £2 earned over £100,000.