Companies Owned and Operated by Families or Sole Director

Running a business as a limited company can save you taxes and protect you from personal liability. But it also means dealing with more paperwork and rules than being a sole trader or running an unincorporated business.

Family and personal companies are common structures and offer their own chances for planning at the end of the year. Even though a limited company is separate from its shareholders and pays taxes on its profits, in a family or personal company, you can’t just focus on the company alone. Taking steps to lower the company’s tax might end up causing a tax bill for a shareholder or an employee. You have to look at the whole situation to make the right decisions.

For instance, giving a bonus to a director can lower the company’s taxable profits because the bonus and the employer’s National Insurance are subtracted. However, the director might end up paying 40% or 45% tax on the bonus, plus the employee’s National Insurance, which could outweigh the tax savings the company gets.

When a company makes a taxable profit from selling an asset, it’s subject to corporation tax. Unlike individuals, companies don’t have a tax-free allowance. The entire profit (after any losses are deducted) is taxable.

This part discusses some general tips for tax planning that are relevant to personal and family companies, directors, and shareholders.

A limited company doesn’t have the choice to use the cash basis for calculating profits; instead, it must use the accruals basis.

To minimize the company’s taxable profits, the same principles discussed earlier apply. This means claiming deductions for all allowable expenses and seeking relief for capital expenditure through the capital allowances system. Additionally, companies can benefit from full expensing for eligible costs on new equipment acquired from 01 April 2023.

The timing of when expenses are incurred, and income is received can affect when tax is due and the rate of relief obtained. From the 2023 financial year, corporation tax rates are set at 25% for profits over £250,000 and 19% for profits up to £50,000. For profits between £50,000 and £250,000, the rate is tapered, with marginal relief. These thresholds are adjusted if a company has associated companies.

When planning the timing of receipts and payments, it’s essential to consider the applicable corporation tax rate.

It’s worth mentioning that the corporation tax rate varies based on the company’s profit level. When deciding the timing of income and expenses, it’s essential to consider the applicable corporation tax rate. This should be included in your year-end review.