2025 Year-End Tax Planning Guide: New & Optimal Strategies

As the tax year draws to a close on 5 April 2025, business owners have a last opportunity to implement strategies to reduce their tax liabilities. Our guide provides a checklist for optimising Income Tax, Corporation Tax, Capital Gains Tax (CGT), Inheritance Tax (IHT), and Value Added Tax (VAT) before the deadline.

Income Tax Planning: Maximising Allowances and Minimising Liabilities

Income tax planning is crucial for business owners, particularly those operating through limited companies, as it involves deciding how to extract profits in the most tax-efficient manner. The most important consideration is the balance between salary and dividends, followed by whether to make pension contributions.

Salary vs. Dividends

For the 2024/25 tax year, the personal allowance is £12,570; income up to this amount is tax-free. The tax-free dividend allowance is £500, with dividends above this taxed at rates depending on the taxpayer’s bracket. National Insurance Contributions (NICs) start at the primary threshold of £12,570 annually, with employees paying 8% on earnings above this limit, and employers paying 13.8% on earnings above £9,100.

Optimal Strategy: Take a salary up to £12,570 to utilise the personal allowance fully, avoiding income tax and employee NICs. Employer NICs will apply on the portion above £9,100 subject to being able to claim the Employment Allowance.

Any additional income should be taken as dividends to benefit from lowest tax rates.

Pension Contributions

Pension contributions are tax-efficient, receiving relief at your marginal rate, and company contributions are deductible from corporation tax. For 2024/25, relief is limited to relevant UK earnings or £60,000 (whichever is lower), with carry-forward rules for unused allowances from the previous three years so any unused allowance from 2021/22 will lapse.

If your income is in excess of £200,000 then your annual allowance may be tapered down to a minimum amount of £10,000. Please speak to us for more details regarding your personal circumstances.

Strategy: Maximise contributions before 5 April 2025, to reduce taxable income. For instance, a £10,000 personal contribution could save £2,000 in tax for a basic rate taxpayer, £4,000 for a higher rate taxpayer, or £4,500 for an additional rate taxpayer. Company contributions reduce corporation tax liability directly.

Individual Savings Account (ISA) Allowances

Currently every UK taxpayer can invest up to £20,000 per year in any combination of Cash ISAs, Stocks and Shares ISAs or Innovative Finance ISAs. Each ISA type allows tax-free income and gains to be made on a different type of asset, and investments can continue to accumulate tax-free over time.

Strategy: If you are planning to use personal funds to place in a high interest deposit account, buy shares or make certain crowd-funded investments anyway, do this in an ISA wrapper to avoid up to 45% tax on the resulting returns.

Junior ISAs can also be used for children, allowing contributions of up to £9,000 per tax year. 

National Insurance Top-Ups

Checking and filling National Insurance gaps can boost your state pension but the deadline of 5 April 2025 to do this for the tax years 2005/06 to 2017/18 is fast approaching.

Strategy: To start, visit the Gov.uk website (Voluntary National Insurance Contributions) and log in with your Government Gateway account to check your record. Look for tax years from 2006-2007 to 2017-2018, noting any partial or full gap years. If you need to fill gaps, you can pay voluntary Class 3 contributions, with costs based on 2022-2023 rates for these years.

Partial years, where you’ve already paid some contributions, often cost less to complete than full gap years.

Contact HMRC here to find out the exact additional amount needed, potentially saving money compared to the £824.20 for a full year.

Calculate the benefit by estimating your retirement duration (e.g., 20 years) and the pension increase per qualifying year, roughly £328.64 annually based on a full pension of £221.20 per week. Compare this with the cost to see if filling gaps is worthwhile, especially if you’re close to 35 qualifying years for the full pension.

Corporation Tax Planning: Managing Profits and Claiming Reliefs

Corporation tax is levied on company profits, with rates varying based on profit levels for the financial year ending 31 March 2025:

• Small Profits Rate: 19% for profits up to £50,000.
• Marginal Relief: Applies to profits between £50,001 and £250,000, providing a gradual increase in the effective rate. The marginal rate of tax on these profits is 26.5%.
• Main Rate: 25% for profits over £250,000.

Strategies:

• Profit Management: Time expenses or defer income to keep profits within the small profits rate or marginal relief band. For example, it may be possible to accelerate purchases of equipment before year-end to reduce taxable profits.
• R&D Tax Credits: If your business invests in research and development, claim R&D tax credits to reduce your tax bill or receive a cash refund. It is important to keep detailed records. We can help you to determine whether you are eligible and what steps need to be taken. There is also a new requirement to pre-notify HMRC where a company intends to make an R&D tax credit claim, so it is important to discuss a prospective claim with us if you think that your business may qualify in the current tax year.
• Group Relief: If your business consists of multiple companies, consider claiming group relief to offset losses against profits, reducing the overall tax liability.

This planning is essential to ensure your company’s tax position is optimised, especially with the sliding scale of rates affecting mid-range profits.

Capital Gains Tax Planning: Timing and Reliefs

CGT is payable on gains made from selling chargeable assets, with rates and allowances for 2024/25 as follows:

• Annual exempt amount: £3,000.
• Rates for non-residential property and other assets: 10% for basic rate taxpayers and 20% for higher/additional rate taxpayers with the rates increasing to 18% and 24% respectively for disposals made on or after 30 October 2024.
• Rates for residential property: 24% for basic and higher rate, 28% for additional rate.

Strategies:

• Timing Sales: Sell assets before 5 April 2025, to utilise the annual exemption, especially if income is lower this year, potentially qualifying for the 18% CGT rate.
• Reliefs: Consider if you can qualify for Business Asset Disposal Relief (BADR), offering a 10% rate on qualifying business assets up to a £1 million lifetime limit. Ensure conditions are met, such as holding shares for at least two years.

Inheritance Tax Planning

IHT is charged at 40% on your estate value above the nil-rate band, with specific allowances for 2024/25:

• Standard nil-rate band: £325,000.
• Residence nil-rate band: Up to £175,000 additional relief if you leave your home to direct descendants.

This potentially increases the total available nil rate bands to £500,000 per person, or £1,000,000 for couples.

Strategies:

• Gifting: Make gifts using the annual exemption (£3,000 per year) or small gifts up to £250 per person. Gifts of any size made more than seven years before death are exempt, so plan before 5 April 2025, to start the clock.
• Trusts: Consider setting up trusts to remove appropriate assets from your estate, reducing IHT liability. For example, placing £100,000 in a trust now could save £40,000 in tax for your estate in the future. If the trust property grows and is not included in your estate, then the eventual saving could be even more.

Recent Changes: The Autumn Budget 2024 froze thresholds until 2030, and from April 2026, agricultural and business property reliefs will be capped at £1 million, so act now to utilise current rules.

How We Can Help

Year-end tax planning is important to avoid overpaying tax. By optimising your salary and dividend mix, maximising pension contributions, managing company profits, timing asset sales, planning gifts, and taking advantage of available tax allowances and exemptions, you can reduce your annual tax burden.

Please speak to us for tailored advice, as tax laws may change and your personal circumstances could impact on the effectiveness of any planning being undertaken.

The information above does not constitute financial advice or recommendations and should not be considered as such. Praxis Advisory LLP is not regulated by the Financial Conduct Authority (FCA) and it is therefore not authorised to offer financial advice.

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