At a glance
- This April, SMEs need to be aware of the raft of tax and regulatory changes coming into play
- Navigating the changes successfully can have significant financial benefits
- We spoke to experts about the steps accountants can take to guide SMEs through the changes
National Insurance rate revisions
From April 2025, UK employers’ National Insurance contributions (NICs) will rise from 13.8% to 15%.
Morgan Davies, Managing Director at Prime Accountants, says he’s had some clients report 70% of their profits being wiped out. “For example, care homes are in an industry where they can’t just pass on the cost to employees or customers, and they are dealing with fixed-price contracts with local authorities and the NHS. They are just having to ride it out.”
Davies recommends that SMEs calculate the cost of this change, then consider their next steps: “Can they pass it on, or could they consider alternatives to labour, such as robotics?”
Corporation tax changes
The main rate of corporation tax remains at 25% this year, after rising from 19% in 2023.
Rob Gunn, Corporate Tax Partner at Crowe, recommends claiming all possible reliefs. “Alongside the increase, quicker relief was given for tax deductions on many fixed assets, which can mitigate some of the tax cashflow impact.”
“Also, in some cases it is now better to have salaries than dividends. The difference is small and the cashflow impact may make it impractical, but it is worth considering.”
Capital allowance adjustments
“One of the best ways to get corporation tax relief is by investing in your business, as it gives you tax relief up front,” says Davies.
The Annual Investment Allowance (AIA) allows businesses to claim 100% first-year capital allowance on equipment purchases up to £1 million, while full expensing has no expenditure limit.
“Be mindful of the timing of making this investment, as it can really impact on tax – do it before year-end rather than after, to get the quickest relief possible.”
Updated VAT thresholds and reporting rules
Johnathan Dudley, Partner and Head of Corporate SME Business at Crowe, says that with the VAT registration threshold increasing to £90,000 from April 2024, businesses aiming for growth should start charging VAT as early as possible.
“Otherwise, loyal customers will be ‘rewarded’ with a 20% price hike for being part of your success.”
He adds, “The extra profit taken could contribute to necessary capital expansion rather than being used to fund drawings. As we know, it’s easy to spend more but less easy to rein it back!”
Dividend allowance reductions
As of April 2024 the first £500 of dividends are tax free as part of the government’s drive to reduce the tax benefit for owner-managed businesses that pay small salaries and take most of their income as dividends, which are taxed less than salaries.
Davies says businesses should assess whether taking a salary may prove more cost-effective than a dividend. He notes that businesses should also look at other strategies: “Benefits such as electric cars, for example… can be investigated to finesse their tax liability.”
Changes to Basis Period Reform
This year, HMRC has transitioned to using the 5 April tax year as the standard basis profit calculation period for all sole traders and partnerships.
For Gunn, “It is important to model the cashflow impact of the change and ensure that you claim the spreading relief where appropriate… It is also important to understand what the impact of this could be on your ability to make pension contributions.”
“Whether you choose to move your year-end should not just be based on income tax considerations particularly if you are in business with others who may be impacted differently by any changes, e.g., in a partnership business.”
“We’ve had some clients report 70% of their profits being wiped out.”
Morgan Davies, Managing Director, Prime Accountants
Changes to R&D tax relief schemes
HMRC’s 2024 changes to Research & Development relief rules make it more difficult to qualify, because too many companies were making claims which weren’t meeting the criteria.
Now, says Davies, businesses need to demonstrate a clear scientific or technological breakthrough and prove that no existing solution achieves the same results. “There is a higher bar of proof, and we are finding lots of owner-managed businesses saying it’s no longer commercially viable to make a claim.”
Pensions tax reform
The Lifetime Allowance (LTA) was abolished from April 2024, but limits on tax-free lump sums remain capped at £268,275. There are still no details about how pensions may be affected by inheritance tax.
For Gunn, many short-term pension changes make understanding the long-term position harder. “In 2006, ‘A Day’ was meant to bring an end to pension complexity and give us all a simplified system to work in. We could do with revisiting that.”
“A pressing concern for many is how much they can save into a pension, not whether they will get to where a cap is, was, or may be again.”
Making Tax Digital (MTD) rollout
By 2026, landlords and traders with turnover above £50,000 will need to comply with MTD for Self Assessment.
“As always, the key is to understand the requirements and whether you have appropriate systems in place to meet them,” says Davies. “It is a big change, but it doesn’t necessarily mean there will be big investment costs, as some of the software is quite cheap.”
“Make sure you get a benefit from the investment, for example using OCR technology to read invoices, and using AI to make processes quicker and better.”
The IFA tax series focuses on a number of tax topics and features speakers who are experts within the industry. More information here.
