5 top tax efficiency tips for limited company directors in 2023/2024

With the ongoing challenges posed by the cost-of-living crisis and (still) rising energy bills, it’s never been more important to be aware of the opportunities to operate your limited company in the most tax-efficient way. 

Staying compliant with HMRC remains crucial, but limited company directors should be proactive in their tax planning to ensure they can still reach their business and personal financial goals despite tax increases at Spring Budget and before.

Here, Joanne Thorne, technical compliance manager at SJD Accountancy, expands on some of the ways in which contractors can optimise the tax-efficiencies available to them, exclusively for ContractorUK.

1. Plan ahead and be responsive to changes

Anyone with a limited company will know the importance of forward planning, but when it comes to organising tax affairs, understanding what tax liabilities will be due at the end of the financial year is an effective way of mitigating unwelcome surprises later on.

This will also allow you to put money aside to account for those tax liabilities, and ensure your money is held in the best, most tax-efficient way.

From checking you are on the right tax code to considering adding more money to your personal pension, there are multiple ways to minimise your end of year tax bill and increase business revenue.

It’s also important to accurately record your income and expenditure details throughout the year, to give a better insight to any changes that may be needed to your financial strategy, and help avoid mistakes in the long run.

To help ensure your tax affairs are fully compliant, it’s advisable to engage with a qualified accountant who can help you develop a more efficient way of organising your tax affairs to maintain your financial confidence and help plan for the future.

2. Be aware of the big corporation tax changes

For the 2023/24 tax year, limited company directors are now subject to increases in corporation tax, which sees the main tax rate increase from 19% to 25%.

While this may seem a significant change, it’s important to note that this rate will differ according to a company’s total profit for that tax year. Yet there’s more to this change than meets the eye, so understanding how it impacts your limited company is essential.

The full 25% rate will only apply to those businesses with a qualifying profit of more than £250,000. Meanwhile, the rate for small businesses with a qualifying annual profit of £50,000, or less, stays at 19%.

For those businesses who have profits between £50,000 (lower limit) and £250,000 (upper limit), the government has introduced marginal relief, providing a seemingly gradual increase in the corporation tax rate between the small profits rate (19%) and the main rate (25%). This has been introduced from April 2023 and it was said by the government that it would help lessen the impact on smaller businesses.

The reality is, however, that profits over £50,000 and less than £250,000 will actually be taxed at a marginal rate of 26.5%, which aims to bring the overall profit in line with the 25% rate. 

For example, for a company whose annual profit is £80,000, the corporation tax liability at a rate of 19% would be £15,200 for the tax year 2022/23.

Since April 2023, the 19% rate only applies to the first £50,000 of profits, while the remaining £30,000 will be taxed at a rate of 26.5%, as the profit falls between the upper and lower thresholds. Therefore, since April 2023 (in this example), the CT liability will rise by £2,250, requiring the business owner to pay a total of £17,450 to HM Revenue & Customs.

In addition, if you have more than one company, and it meets HMRC’s’ ‘associated company’ rules, then the profit levels are split across the companies, meaning that you could pay tax at a higher rate much earlier. Two associated companies, for example, will see a higher rate of tax being charged once they exceed £25,000 of qualifying profits in each company, rather than the £50,000 if they had only one.

3. You may need to register for VAT

At Autumn Budget 2022, the chancellor confirmed that the VAT registration threshold of £85,000 will remain in place for a further two years until April 1st 2026.

This means those contractor companies which are increasing their prices to compete with the rising cost of materials and services, may need to register for VAT sooner than anticipated.  With HMRC threatening penalties for the non-compliant, the VAT threshold not increasing at a time when every other price is increasing, has got to be one to remain vigilant of -- simply to ensure your hard-fought tax efficiency doesn’t get wiped out by a VAT sanction.

4. Be savvy to what tax relief you can claim

Claiming tax relief helps to reduce the profit/income figure against which tax is calculated -- less income or profit means less tax to pay overall.

Limited company directors need to ensure they are claiming any and all tax relief available to them, such as:

• stationery
• uniform
• tools and equipment
• vehicles
• travel costs (fuel, parking, public transport)
• stock
• costs of advertising/marketing
• costs of eligible training courses.

It’s advisable to regularly review your list of expenses and ensure you are including everything classed as being business-related. However, bear in mind that tax-deductible expenditure is still an initial outgoing from the company purse in the first instance.

Be wise to whether you can and should reduce company spending as, even if your business is thriving, less expenditure can still represent more money in your own back pocket as a business-owner.

5. Make use of your pension

In a welcome boost for contractors, the chancellor has announced that the standard annual allowance for pension contributions of £40,000 increased to £60,000 in line with the new tax year (April 6th 2023). The lifetime allowance cap has now been removed, too.

Pensions are one of the few remaining tax-deductible benefits for the self-employed, and can provide both tax relief initially, while also increasing savings for the future.

Company pension contributions get tax relief directly through the company, and could be a useful strategy to employ, especially given that the corporation tax paid will be based purely on the profit for the year, and company contributions can reduce this. Personal contributions receive the tax relief by effectively increasing the amount of money that you can earn before you pay tax.

However, this is not a one-size-fits-all approach, and locking money away for the long term may not work for everyone.

The latest changes to the annual allowance and lifetime allowance are aimed at making pension contributions more attractive and encouraging people to work longer, but speaking with a financial or pension adviser could help you to understand your options better.