What to do before your company's year end

Most limited company owners think about tax when the accounts arrive, which is usually several months after the year has finished. By that point the figures are settled. Whatever was spent has been spent, whatever was drawn has been drawn, and the job is to report it accurately and work out what is owed.

The decisions that change the number happen earlier, inside the accounting period itself. None of them are exotic or aggressive, and most are things you were going to do anyway, where the only question is timing. Below is what we look at with clients in the months before a year end, and why each one is worth a conversation while it can still make a difference.

Why the date itself matters so much

Your company has an accounting period, usually twelve months, ending on a date set when the company was formed or changed since. Corporation tax is charged on the profit made in that period. Expenditure that falls a day after the end belongs to next year's figures, however sensible it was.

That cut-off matters more than people expect, because of the way the rates work in the middle. Profits up to £50,000 are taxed at 19% and profits above £250,000 at 25%. In between, the company is charged the full 25% and then given some of it back as marginal relief, and that relief shrinks as profit rises.

The result catches people out the first time they see it. On profit between £50,000 and £250,000, every extra pound costs 26.5% in tax, which is more than the 25% top rate. The arithmetic is easiest to see at the two ends of the band. A company whose profit lands on £50,000 pays £9,500. A company on £250,000 pays £62,500. So the £200,000 of profit between those two points carries £53,000 of tax, and £53,000 out of £200,000 is 26.5%. You are paying the 25% and losing a slice of relief at the same time, and together they come to 26.5p in every pound.

That band is where year-end timing is worth the most. If your profit is heading somewhere between £50,000 and £250,000, a pound of allowable spending brought into this period saves you 26.5p. The same pound spent a fortnight later, in a year where profit lands under £50,000, saves only 19p. If you control more than one company the thresholds are divided between them, which pulls more businesses into that band than expect to be in it.

The payment date follows the period, so it does not move with the filing date. Corporation tax is due nine months and one day after the period ends, while the return itself is not due for a full twelve months. Knowing the number early is useful for cash flow even where nothing changes.

Capital spending, and getting the timing right

If you are going to buy equipment, machinery, commercial vehicles, computers or fit out premises, whether the spending lands before or after the year end decides which year it reduces. The annual investment allowance gives full relief on up to £1 million of qualifying expenditure, and full expensing allows companies to deduct the whole cost of qualifying new plant and machinery in the year it is bought.

Two points catch people out. The relief follows when the expenditure is incurred, which is a different test from when you settle the invoice, so an asset ordered in good time but delivered after the year end can fall into the wrong period. And cars sit under their own rules instead of these allowances, with the treatment depending on emissions, so a vehicle purchase needs checking before it is committed to.

None of this is a reason to buy something the business does not need. A purchase that saves 26.5% in tax still costs you the other 73.5% in cash. It is a reason to bring forward something already planned, or to wait a few weeks where next year's profit is expected to be higher.

How you pay yourself

Salary, dividends and pension contributions are the three routes out of a company, and they behave differently against the two dates in play. Salary and employer pension contributions are company costs that reduce corporation tax in the period they fall. Dividends are paid from profit after tax, so they do not reduce the company's bill at all.

Dividends matter for a different reason. They are taxed on you personally in the tax year they are declared, against 5 April rather than your company's year end, at 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% above that, after a £500 allowance. Where a dividend falls either side of 5 April can change your personal bill considerably, particularly if one year pushes you into a higher band while the next would not.

Employer pension contributions are the one route that reduces corporation tax and builds something for you at the same time. They are deductible in the period the money leaves the company bank account, so an accrual does not count and a contribution intended for this year has to be paid before the year end. The annual allowance is £60,000, and unused allowance from the three previous years can often be carried forward, which makes a larger one-off contribution possible in a good year. Contributions need to be justifiable as part of your overall remuneration, so it is worth agreeing the figure with us before it is paid.

The director's loan account

If you have taken money out of the company that was not salary, dividend or expense reimbursement, your loan account is overdrawn. Where that balance is still outstanding nine months and one day after the year end, the company pays a charge of 33.75% of it. The money comes back when the loan is repaid, but it can sit with HMRC for a long time in the meantime, and it is cash the business could have been using.

This is one of the most avoidable charges we see. Clearing the balance before the deadline removes it, whether by repaying the money, voting a dividend where there are distributable profits to cover it, or putting through a bonus. Each route has a different personal tax cost, so the right answer depends on your own position that year.

There is also a benefit in kind to consider. Where the loan exceeds £10,000 at any point and is interest free, or charged below HMRC's official rate, the difference is a taxable benefit and carries employer National Insurance for the company. Charging interest at the official rate is often the tidier answer.

Bonuses, accruals and the ordinary tidy-up

A bonus voted before the year end can be deducted in that period even though it is paid later, provided it is paid within nine months of the period end. That gives a genuine timing choice: the deduction lands this year while the PAYE and the personal tax fall in the next. It needs documenting properly at the time, because a note written months afterwards carries much less weight.

Alongside that sit the less interesting items that still change the figure. Stock should be reviewed and written down where it is worth less than cost. Invoices you have accepted will never be paid can be written off as bad debts once the position is clear. Expenses you have personally paid for the business and never reclaimed belong in the accounts. Work in progress on longer jobs needs valuing properly, and an estimate will not do.

Individually these are small. Taken together across a year they frequently move the profit figure by more than the one large decision everyone focuses on.

When to have the conversation

The useful point is two or three months before the year end, when there is a reliable estimate of where profit will land and still time to act on it. We take your figures to date, forecast the rest of the period, and show you the likely corporation tax bill and the band it falls in. From there the choices are concrete: whether to bring spending forward, what pension contribution makes sense this year, how to deal with the loan account, and how dividends should sit around 5 April.

Some years the honest answer is that nothing needs changing, and we will tell you that rather than manufacture a reason to act. The value in the review is knowing the number early and having made the decisions deliberately, instead of finding out nine months later what they turned out to be.

This work sits inside our tax planning and advisory service, and for clients we look after it happens as a matter of course. If your current accountant only speaks to you when the accounts are ready, switching is more straightforward than most people expect.