Tax Planning Strategies for Owner-Managed Businesses and Entrepreneurs Under the Labour Government

The recent election of a Labour government is likely to bring about potentially significant changes to tax policies, which could impact owner-managed businesses and entrepreneurs. We always recommend taking the time to understand the potential changes so that you can take advantage of any tax planning opportunities.

The changes proposed by Labour are well publicised and we won’t reiterate them here. Instead, here’s a guide to various tax planning ideas, from simple to more complex, for you to think about.

When to Expect the First Budget?

Tax policy is reviewed and implemented at the Budget, with 30 October 2024 being set by the Chancellor as the date for the autumn budget. In terms of timing, tax changes announced at the budget can be implemented at various points, ranging from the day of the Budget announcement to several months later, such as taking effect from 5 April.

“Easy” Tax Planning

1.      Reviewing Salary vs. Dividend Strategies
One of the simplest yet effective tax planning strategies is reviewing the balance between taking a salary and dividends. Labour have advised that they are not intending to change income tax or corporation tax rates, however with recent changes by the Conservative Government the overall tax savings of dividends are lower than they have been and in some cases, it may now be more tax effective to take salary.

Key considerations include:

Salary: Subject to National Insurance Contributions, but allows for pension contributions and qualifies for certain state benefits. Deductible for corporation tax.

Dividends: Typically taxed at lower rates than salaries. Not deductible for corporation tax.

Loan repayments: If the shareholder has made loans to the company then charging interest on this loan can be very tax effective. The reason for this is that the personal savings allowance enables up to £1,000 of interest to be received and taxed at 0%. A note of caution is that the company will be required to deduct 20% tax at source and report this to HMRC on form CT61, but this tax can be claimed back by the individual.

Reviewing your remuneration strategy would be recommended to ensure that it is as tax effective as possible.

2. Maximising Pension Contributions
Pension contributions are a tax-efficient way to save for the future while reducing your taxable income. Under current rules, contributions to approved pension schemes are tax-deductible for corporation tax. This makes pension contributions one of the most tax efficient ways of extracting cash from a business. Rachel Reeves has advised that she does not intend to reintroduce the lifetime allowance, but pensions will likely remain a key planning tool:

Annual Allowance: Utilise the full annual allowance for pension contributions to reduce taxable income. The allowance is £60,000 for 2024-25.

Carry Forward: If not used in previous years, consider using the carry forward allowance to maximise contributions.

3. Utilising the Annual Investment Allowance (AIA) or Full Expensing
The AIA and Full Expensing Relief provides a 100% deduction on qualifying capital expenditure up to a certain limit. This can be an effective way to reduce taxable profits by investing in business assets. Reviewing the businesses need and plan for capital expenditure can be beneficial to assist with reducing the corporation tax liability for a year.

4. Tax Benefits of Electric Vehicles (EVs) in the UK
Opting for an electric car can yield significant tax advantages in the UK. The government offers various incentives, including:

a) Lower Benefit-in-Kind (BiK) rate for company car drivers, which is just 2% for electric vehicles as of 2024-25.

b) Enhanced capital allowances are also available for businesses, allowing them to deduct the full cost of an electric car from their pre-tax profits.

These incentives make electric vehicles not only an environmentally friendly choice but also a financially savvy one for both individuals and businesses.

More considered tax planning.

5. Claiming R&D Tax Credits

If your company is involved in innovative activities, R&D tax credits can provide significant tax relief. There are significant changes affecting R & D tax credits at the moment so taking advice is strongly recommended. Key questions to ask to determine if your company may fall within the regime are:

Are you developing or creating a new product, service or process within your specific sector or industry. If so, is this something that could not be achieved or done easily by qualified individual with qualifications/experience in this area?

If this could be the case, then it is worth considering whether additional tax relief is available for your business. This is an area of significant complexity and seeking tax advise is strongly recommended to ensure a robust and considered claim is submitted to HMRC.

6. Patent Box Relief

Patent box relief offers a valuable opportunity for companies to significantly lower their effective corporate tax rate on profits generated from patented inventions or those over which they hold an exclusive licence.

The benefit of patent box is the tax rate attributed to patent profits reduces to 10% from a current main corporation tax rate of 25%. A tax saving.

Reviewing whether the company has any qualifying patents, or indeed whether it is worth acquiring a patent to benefit from this regime could significant reduce a company’s tax liability.

7. Exploring Tax-Efficient Investment Opportunities

Investing in schemes that offer tax relief for individuals can be beneficial:

Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS): Provide income tax relief for investments in qualifying companies, with potential for CGT exemption on gains.

Venture Capital Trusts (VCTs): Offer income tax relief and tax-free dividends for investments in VCTs.

Specific funds: Some funds are designed specifically to offer tax relief under Agricultural Property Relief or Business Relief which can be effective for Inheritance Tax Planning.

More complex planning.

8. Considering Capital Gains Tax (CGT) Planning

CGT may see changes under Labour, potentially increasing rates or reducing reliefs. Planning in advance can help mitigate the impact:

Business Asset Disposal Relief: Formerly known as Entrepreneurs’ Relief, this allows for a reduced CGT rate of 10% on the sale of qualifying business assets up to £1m per person. For shareholders considering selling their business, aiming to get this done ahead of the Budget would ensure the current CGT reliefs are available to you.

Utilising Annual Exemptions: Make use of annual CGT exemptions of £3,000 per annum to realise gains tax-free up to the limit.

Therefore if you are considering, or in the process of selling your trading company, it may be worth considering looking to complete this ahead of the Budget to ensure you can benefit from the current tax rates and reliefs.

9. Incorporation of a Sole Trader or Partnership

Converting a sole trader or partnership into a limited company can provide tax advantages, particularly where it relates to a property business on which there are mortgages.

Tax Efficiency: Potential to reduce overall tax liability through salary and dividends, lower corporation tax rates, and benefits from allowable business expenses. For a property business full relief is available on mortgage interest unlike where the properties are held personally or in a partnership.

Future Planning: Labour policies might impact the benefits of incorporation, so it’s essential to weigh current advantages against potential changes.

10. Estate and Succession Planning

Effective estate and succession planning can help manage future tax liabilities and ensure smooth business continuity. Very broadly, Inheritance Tax is charged at 40% for any estate’s worth in excess of £325,000 per person.

Gifts and Trusts: Consider transferring assets during your lifetime to reduce the value of your estate and potentially benefit from lower tax rates.

Family Investment Companies: These can be used to manage and pass on family wealth while retaining control.

There are a number of IHT planning opportunities and seeking advice ensures that no adverse tax consequences arise as a result of this.

Conclusion.

Whilst it is always hard to predict what changes there might be under a new Government, we can anticipate some changes and it seems more likely that tax rates will rise rather than fall. For this reason it is worth maximising the tax planning opportunities available ahead of the Budget where possible.

Seeking tax advice beforehand is strongly recommended to ensure that the maximum benefit is obtained and there are no unforeseen consequences.