As we move into the final months of the 2023/24 tax year, it is time to give some thought to whether you have used your 2023/24 dividend allowance yet, and whether it is worth extracting further profits as dividends before the end of the tax year. Once a salary has been taken equal to the personal allowance of £12,570, it is tax efficient to extract further profits as dividends.

Nature of the dividend allowance

The dividend allowance is available to all taxpayers, regardless of the rate at which they pay tax. The allowance is set at £1,000 for 2023/24, but will fall to £500 for 2024/25. Dividends sheltered by the allowance can be enjoyed free of tax by the recipient; however, as the allowance uses up part of the tax band in which the dividends fall, it is more of a zero-rate band than a true allowance.

Dividend tax rates

Dividends are taxed as the top slice of income and the dividend tax rates are less than the general income tax rates. Where dividends fall in the basic rate band, they are taxed at the dividend ordinary rate of 8.75%; where they fall in the higher rate band, they are taxed at the dividend upper rate of 33.75%; and where they fall in the additional rate band, they are taxed at the additional dividend rate of 39.35%. By comparison, the basic rate of income tax is 20%, the higher rate of tax is 40% and the additional rate is 45%.

Restrictions on paying dividends

Dividends are paid from post-tax profits which have already suffered corporation tax. A dividend can only be paid where a company has sufficient retained profits from which to pay the dividend.

Further, dividends must be paid in proportion to shareholdings, although this restriction can be overcome by having an alphabet share structure which allows dividend payments to be tailored to the shareholder’s circumstances. Where this is used, each shareholder has their own class of share, e.g. A ordinary shares, B ordinary shares, and so on, meaning that a dividend can be paid to that shareholder only by declaring a dividend for the class of share that they hold.

Don’t waste the allowance

If you haven’t declared any dividends in 2023/24 and have the profits to do so, it is worth declaring dividends to use up your 2023/24 allowance. As the dividend allowance falls from £1,000 for 2023/24 to £500 for 2024/25, dividends that are not taxable if declared before 6 April 2024 may be taxed if declared on or after that date.

In a family company scenario, check whether all shareholders have used up their dividend allowance and, if not, consider declaring dividends so that their allowances are not wasted. Options for extracting profits without triggering a personal tax liability are limited, so, where possible, it makes sense to take advantage of the tax-free extraction routes available.

Remember, when assessing how much of your dividend allowance remains unused, to take account of any dividends that you have received from investments.

Further dividends

If you need funds outside the company and have already used your dividend and personal allowance, consider the rate at which those dividends will be taxed. If your basic rate band has not been used in full, it may be preferable to take dividends before 6 April 2024 to ensure that they are taxed at the dividend ordinary rate of 8.75%, particularly if you are likely to be a higher or additional rate taxpayer in 2024/25.

The self-employed have historically paid two classes of National Insurance – Class 2 and Class 4. However, this is set to change from April 2024 with the abolition of Class 2 National Insurance contributions.

What are Class 2 contributions?

The payment of Class 2 contributions has enabled a self-employed person to build up entitlement to the state pension and contributory benefits.

Class 2 contributions are flat-rate weekly contributions payable where profits from self-employment exceed the lower profits threshold, set at £12,570 for 2023/24. The threshold is aligned with the personal allowance and the lower profit limit applying for Class 4 purposes.

Where profits fall between the small profits threshold (set at £6,725 for 2023/24) and the lower profits threshold, a self-employed earner is treated as having paid Class 2 contributions at a zero rate, thereby earning a qualifying year without actually having to pay any National Insurance.

A self-employed earner whose profits are below the small profits threshold is not liable to pay Class 2 National Insurance contributions, but can make voluntary contributions if they choose in order to maintain their state pension record. This is a much cheaper option than paying Class 3 contributions.

The abolition of Class 2 contributions has been a long time coming. Class 2 contributions were to have been abolished and Class 4 contributions reformed with effect from 6 April 2019 (having already been delayed a year). Following a U-turn, the reforms were put on hold as a result of concerns that self-employed earners with low earnings would lose out. However, the introduction of the lower profits threshold and a deemed zero rate on contributions between the small profits threshold and lower profits threshold has addressed this issue, paving the way for the abolition of Class 2 contributions.

Class 4 contributions

Class 4 contributions are profit-related contributions payable by self-employed earners. Contributions are payable at the main Class 4 rate on profits between the lower profits limit and the upper profits limit, and at the additional Class 4 rate on profits in excess of the upper profits limit.

For 2024/25, the lower profits limit is £12,570 and the upper profits limit is £50,270, unchanged from 2023/24 and due to remain at this level until 5 April 2028.

For 2024/25, the main Class 4 rate is 8%, having been reduced from 9%. The additional Class 4 rate is 2%.

Building up pension entitlement for 2024/25 and beyond

With the abolition of Class 2 National Insurance contributions from 6 April 2024, self-employed earners will for 2024/25 onwards build up entitlement to the state pension and contributory benefits where their earnings exceed £12,570. This is the point at which Class 4 contributions become payable.

However, self-employed earners with profits between £6,725 and £12,570 for 2024/25 will receive a National Insurance credit, earning them entitlement to the state pension and contributory benefits, despite not paying any National Insurance.

For 2024/25, self-employed earners with profits of less than £6,725 will still be able to make voluntary contributions at the 2023/24 Class 2 rate of £3.45 per week. This will be much cheaper than paying Class 3 voluntary contributions, which are to remain at £17.45 per week for 2024/25.

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Tax and accounting rules are not identical and it is sometimes necessary to adjust the accounting profit to arrive at the profit for tax purposes. One area where the rules differ is in the write-off of capital expenditure.

For accounting purposes, depreciation is charged to the accounts so as to write off the asset over its useful economic life. This may, for example, be on a 33% reducing balance basis or on a 25% straight line basis.

By contrast, for tax purposes, relief for capital expenditure is given by way of capital allowances.

The capital allowances that are available depend on the nature of the asset, and there may be more than one possible claim. For example, qualifying expenditure on plant and machinery may benefit from the annual investment allowance (AIA) which allows a 100% deduction for the expenditure in the year in which it is incurred up to the £1 million AIA limit. Where the AIA is not available, or the taxpayer does not wish to claim it, writing down allowances are given at the rate of 18% for main rate expenditure and at 6% for special rate expenditure. Companies can also benefit from full expensing on qualifying new plant and machinery that would otherwise be eligible for main rate writing down allowances. Like the AIA, this provides immediate relief for the full amount of the expenditure but, unlike the AIA, the amount of expenditure that can benefit from full expensing is not capped. A 50% first-year allowance is available to companies on new qualifying assets that would otherwise qualify for special rate writing down allowances, as long as the expenditure is incurred on or before 31 March 2026. This can be useful if the AIA has been used up. First-year allowances are available at a 100% rate for new zero emission cars. This again is beneficial as expenditure on cars does not qualify for the AIA, full expensing or the 50% first-year allowance available to companies.

Adjusting the profit

As a result of the differences between depreciation and capital allowances, it is necessary to make an adjustment to the accounting profit to arrive at the taxable profit. Depreciation must be added back to the accounting profit and capital allowances deducted (or balancing charges added) to arrive at the taxable profit. Further adjustments may be needed for other expenses that are not allowable for tax purposes, such as entertaining expenses.

Where the AIA or full expensing is claimed, relief is given in full for tax purposes earlier than for accounting purposes. This means that the taxable profit will be lower than the accounting profit in the year in which the expenditure is incurred, but in subsequent years the accounting profit will be lower as depreciation will continue to be charged but the capital allowances have already been given.

Example

A Ltd is a new company and spends £200,000 on plant and machinery on which it claims the AIA.

For accounting purposes, depreciation is charged at 30% on a reducing balance basis.

The accounting profit for the year is £350,000 after charging depreciation of £60,000.

To arrive at the taxable profit, the depreciation of £60,000 must be added back, but the company can deduct the capital allowances of £200,000. The taxable profit is therefore £210,000.

The marriage allowance is not a separate allowance as such – rather, it is a transfer of part of one spouse or civil partner’s personal allowance to their spouse or civil partner. It should not be confused with the married couple’s allowance which is available where at least one spouse or civil partner was born before 6 April 1935.

The marriage allowance allows one spouse or civil partner to transfer 10% of their personal allowance (as rounded to the nearest £10) to their spouse or civil partner. However, the transfer is not permitted if the recipient pays tax at the higher or additional rate. For 2023/24 the personal allowance is £12,570 and the marriage allowance is £1,260.

Claiming the marriage allowance is beneficial if one spouse or civil partner is unable to use their personal allowance in full, and the other pays tax at the basic rate. Utilising the allowance can save a couple up to £252 in tax in 2023/24 (£1,260 @ 20%).

The only permitted transfer is £1,260 – it is not possible to transfer more of the personal allowance where this is unused or less if the amount unused is less than £1,260. However, if the unused personal allowance is less than £1,260 and making the transfer would mean that overall, the couple would pay less tax, it would be beneficial (although it may mean that some tax is now payable by the transferor).

Where the marriage allowance is claimed, the personal allowance of the spouse or civil partner making the transfer is reduced by £1,260 to £11,310, whereas the recipient’s personal allowance is increased to £13,830.

Older couples benefiting from the married couple’s allowance cannot also claim the marriage allowance.

Making a claim

A claim can be made online by visiting the Gov.uk website at www.gov.uk/apply-marriage-allowance. The claim can be made for the current tax year and also for 2019/20 and any later tax year for which the couple were eligible to make the claim. Once a claim has been made, it will apply for subsequent tax years until the claim is cancelled. This too can be done online.

Claims for the allowance can also be made through Self Assessment or by completing the marriage allowance form MATCF (see www.gov.uk/guidance/apply-for-marriage-allowance-by-post) and sending it to the address on the form.

Example 1

Alex and Anna are married. Alex earns £30,000 a year. Anna looks after their young daughter and has no income in 2023/24.

The couple claim the marriage allowance. As a result, Alex’s personal allowance is increased by £1,260, reducing the tax that he pays by £252.

Example 2

Jake and John are in a civil partnership. Jake works part-time while studying and earns £12,000 in 2023/24. John has income of £40,000 in 2023/24.

Jake is only able to use £12,000 of his personal allowance, leaving £570 unused. Although he cannot tailor the marriage allowance to transfer this to John, a claim is still worthwhile.

Making the claim will reduce Jake’s personal allowance by £1,260 to £11,310. As a result, he will now have to pay a small amount of tax as his income exceeds his reduced personal allowance by £690, generating a tax liability of £138 (£690 @ 20%).

However, John’s personal allowance will increase by £1,260, reducing the tax that he pays by £252.

Overall, despite the fact that Jake must now pay some tax, the couple’s combined tax bill is reduced by £114 (£252 − £138) as a result of claiming the allowance.

In personal and family companies, directors often borrow money from the company as this is a cheaper and easier option than taking out a commercial loan. However, there can be tax consequences for both the director and the company.

If the loan balance exceeds £10,000 at any point in the tax year, a tax charge would arise under the benefit in kind rules if the interest paid by the director on the loan, if any, is less than that which would be payable at the official rate. The taxable amount is the interest due at the official rate, less any interest paid by the director. The company must also pay Class 1A National Insurance on the taxable amount.

Further tax consequences arise if the company is a close company (as most personal and family companies are) and the director’s loan account is overdrawn at the year end and remains so at the corporation tax due date nine months and one day after the year end. A close company is, broadly, one controlled by five or fewer people. Where this is the case, the company must pay tax on the outstanding loan balance. This tax is known as section 455 tax. If the loan is outstanding at the year end but cleared before the corporation tax due date, there is no section 455 tax to pay, but the loan must be reported on the company tax return. The rate of section 455 tax is linked to the dividend higher rate, and is 33.75% in respect of loans made on or after 6 April 2022.

Although paid at the same time as corporation tax, section 455 tax is not corporation tax and, crucially, is a temporary tax as it becomes repayable once the loan balance is cleared.

The tax can be reclaimed nine months and one day after the end of the accounting period in which the loan was repaid, released or written off. The tax becomes repayable on the day that the corporation tax for the period is due. To reclaim the tax, the loan does not need to be cleared in full – if part of the loan balance is repaid, released or written off, you can reclaim the tax due on that part of the loan.

A claim can be made on form L2P. This can be done online by visiting the Gov.uk website at www.gov.uk/guidance/reclaim-tax-paid-by-close-companies-on-loans-to-participators-l2p. A claim can be made by your agent on your behalf.

To make a claim, you will need your Unique Taxpayer Reference (UTR) and your bank details to hand. You will also need to provide the following information:

• the start and end dates for the accounting period in which the loan was made;
• the date the loan was made;
• the start and end dates for the accounting period when the loan, or part of the loan, was repaid, released or written off;
• the date that the loan, or part of the loan, was repaid, released or written off;
• the amount of the loan or part of the loan repaid, released or written off; and
• the date when the relief is due.

Once a claim has been submitted, HMRC will issue a revised tax calculation showing what is owed. The reclaimed tax will be set against any corporation tax owed to HMRC in the first instance, with any excess being repaid by HMRC.

Strict reporting deadlines apply under Real Time Information (RTI). Employers are required to report employees’ pay and deductions to HMRC electronically on the Full Payment Submission (FPS) at or before the time that the payment is made to the employee. Employers who report late for more than one tax month in the tax year are charged penalties. While HMRC do allow a three-day period of grace and will not charge a penalty if the employer occasionally reports in this window, this is a concession rather than an extension to the deadline and should not be relied on.

In December, many employers opt to pay their employees on a day other than their usual payday. This may be because the normal payday falls on a bank holiday or because the business closes over the Christmas and New Year period. An employer may also choose to pay employees early in December as a goodwill gesture.

In 2019 HMRC introduced a permanent easement where employers paid their employees earlier than usual over the Christmas period. Rather than requiring pay and deductions to be reported by the actual payment date, instead the employer should use their usual or contractual pay date as the payment date in the FPS and ensure that it reaches HMRC by that date. As long as the FPS is submitted by the usual payday it will not be regarded as late by HMRC, even if the employees were paid on an earlier date. The reason for the easement is to help protect employees’ entitlement to Universal Credit.

Example

An employer normally pays its employees on the last Friday of the month. In December, this falls on 29 December 2023. However, as the employer shuts during the Christmas week, opening again on 2 January 2024, employees are instead paid on the last working day in December, which is Friday 22 December 2023.

While it may be convenient to send the FPS when running the payroll on that date, the employer should still report the payment date as the usual payday of 29 December 2023. As long as the FPS is submitted by 29 December 2023 it will be treated as having been filed on time.

Although the deadline for submitting your 2022/23 tax return online is midnight on 31 January 2024, if you owe tax and you want to have it collected through PAYE via an adjustment to your tax code, you will need to file your tax return by the earlier date of 30 December 2023.

If the option to pay any tax you owe via PAYE is available to you, it can be attractive. Not only are you saved from having to pay the bill in full by 31 January 2024, but you can also pay what you owe in instalments without needing to set up a Time to Pay arrangement. Further, there is no interest to pay – a bonus in times of high interest rates.

Qualifying conditions

Paying your Self Assessment tax bill through your tax code is only an option if all of the following conditions are met:

• You owe less than £3,000 in total.
• You already pay tax through PAYE, for example, because you are an employee or because you receive a company pension.
• You submitted your 2022/23 tax return online by 30 December 2023 (or filed a paper return by 31 October 2023).

It is important to note that if your Self Assessment bill is more than £3,000, you cannot pay it via PAYE – even if you make a part payment to reduce the outstanding amount to £3,000 or less. However, if you are struggling to pay, you may be able to set up a Time to Pay arrangement (which can usually be done online if you owe £30,000 or less).

It will not be possible to pay your tax through PAYE if you do not have enough PAYE income for HMRC to collect what you owe or if deducting your Self Assessment tax via PAYE would result in you  paying more than 50% of your PAYE income in tax or paying twice as much tax as you usually do.

Automatic set-up

If you have filed your tax return by the 30 December 2023 deadline and you meet all three of the conditions set out above, HMRC will automatically amend your 2024/25 tax code to collect the tax that you owe under Self Assessment for 2022/23 – you do not need to ask them to do this. If you do not want them to collect tax in this way and you have filed your return by 30 December 2023, you will need to tell them.

Your code is adjusted so that you will pay the tax that you owe in 12 instalments over the tax year in addition to the usual deductions from your pay. For example, if you owe £1,200 and you are a basic rate taxpayer, your personal allowances will be reduced by £6,000, so that if you receive the personal allowance of £12,570, your code for 2024/25 will be 657L. You will pay an additional £100 a month in tax as a result for 2024/25.

In setting up a trade it is inevitable that expenses will be incurred before the trade actually commences. Expenses may be incurred on acquiring premises and kitting them out, on buying stock, on office supplies, on professional advice, on marketing, on software, on setting up a website, on legal fees and suchlike. These can mount up, so it is important to secure tax relief where possible. Relief for pre-trading expenses is available to both unincorporated business and companies.

Relief is only available to the person (individual or company) who incurred the expenditure and commenced the trade.

Revenue expenses

The general rule is that revenue expenses incurred in the seven years prior to the date on which the trade starts are deductible if they would be so deductible had the expense been incurred once the trade had commenced. The usual rules to determine whether an expense is deductible apply (i.e., whether it is revenue in nature and incurred wholly and exclusively for the purposes of the business). To give effect to the relief, the pre-trading expenses are treated as if they were incurred on the first day of trading and deducted in calculating the profits for the first accounting period.

Capital expenses

Relief for capital expenses depends on whether the accounts are prepared on the cash basis or not. Where the cash basis is used, if the expense is one that would be deductible under the cash basis capital expenditure rules, as with revenue expenses, the expense is treated as incurred on the first day of trading and deducted in calculating the profits for the first accounting period.

However, if relief would be given through the capital allowances system, capital allowances are available for the pre-trading expenditure, the expenditure being treated as if it had been incurred on the first day of trading.

HMRC are sending one-to-many ‘nudge’ letters to taxpayers who included an invalid claim for gift hold-over relief in their 2021/22 tax return. This may be because a separate claim form was not included with the return, or the claim form was included but not signed. If you receive such a letter, it is important that you do not ignore it – without a valid claim, HMRC will require any capital gains tax due to be paid now rather than deferred.

What is gift hold-over relief?

Gift hold-over relief is a useful capital gains tax business relief that allows the capital gains tax due on a gift to be deferred by ‘holding over’ the gain, reducing the transferee’s base cost by the amount of the held-over gain. The relief is often used to aid succession planning.

Eligible gifts

The relief is available for:

• gifts of business assets used for the purpose of a trade or profession carried on by an individual as a sole trader or as a partner in a partnership, by an individual’s personal company or by a member of a trading group where the holding company is the individual’s personal company;
• gifts of unlisted shares and securities in a trading company or the holding company of a trading group where the individual owns at least 5% of the shares (for trustees, the holding must be at least 25%);
• gifts of land deemed to be agricultural land for inheritance tax purposes;
• assets the disposal of which is a chargeable transfer for inheritance tax and not a potentially exempt transfer; and
• certain gifts that are exempt from inheritance tax, such as a gift from a trust for bereaved minors.

Mechanics of the relief

As a gift by its very nature is not made at arm’s length, any gain arising on disposal is calculated by reference to the market value of the asset rather than the proceeds, if any. For an outright gift, the full gain (calculated using the market value as the consideration) can be held over. The transferee’s base cost is the market value as reduced by the held-over gain.

Example

Bill gives his son James his workshop, which cost £50,000. At the time of the gift, the market value was £140,000. The gain is £90,000, which Bill and James agree to hold over. James’ base cost is £50,000 – the market value of £140,000 less the held-over gain of £90,000.

If the transferor receives some proceeds, the gain computed by reference to the actual proceeds is immediately chargeable. However, the difference between the market value and the proceeds can be held over.

Example

Elizabeth sells her studio to her daughter Dawn for £40,000. It cost her £30,000 and has a market value of £75,000. They claim hold-over relief. The £10,000 difference between the proceeds (£40,000) and the original cost (£30,000) is immediately chargeable. However, the remainder of the gain (the difference between the market value and the proceeds) of £35,000 is held over. Dawn’s base cost is £40,000 (£75,000 – £35,000).

Joint claim

The claim must be made jointly by the transferor and the transferee on the dedicated claim form. It must be signed by both parties.

Dealing with the letter

If you receive a nudge letter you should send HMRC a valid claim form signed by both parties or, if the gift is not eligible for the relief, amend your tax return to remove the claim.

If you have unrelieved overlap profits, you will not be able to claim relief for those profits after 2023/24. Overlap profits are profits that have been assessed twice – either in the early years of a business or on a change of accounting date.

From 2024/25, unincorporated businesses will be taxed on the profits for the tax year regardless of the date to which they prepare their accounts. Where the accounting period does not correspond with the tax year, the profits from two accounting periods will be apportioned to arrive at the profits for the tax year. As a result, profits are only ever taxed once, removing the problem of overlap profits.

The current year basis (under which the profits taxed for the tax year are those for the accounting period ending in that tax year) came to an end in 2022/23. Under the current year basis, relief for overlap profits was given either on a change of accounting date which resulted in more than 12 months’ profits being taxed in a tax year, or on cessation.

The 2023/24 tax year is a transitional year moving from the current year basis to the tax year basis. The profits for that year are those from the end of the accounting date in 2022/23 to the accounting date ending in 2023/24 (the standard part) plus those from the end of that period to 5 April 2024 (the transition part). Any unrelieved overlap profits can be deducted from the transition profits.

If relief for remaining overlap profits is not claimed for 2023/24, it will be lost.

Establishing overlap profits

On 11 September 2023, HMRC launched an online service to help unincorporated businesses establish their overlap profits available for relief. The service is available on the Gov.uk website at www.gov.uk/guidance/get-your-overlap-relief-figure.

You may be able to make a claim for overlap relief for 2023/24 if:

• your accounting date does not align with the tax year (i.e., it is not a date between 31 March and 5 April inclusive);
• you changed your accounting date to align with the tax year but did not claim relief for overlap profits on the change of accounting date; or
• you changed your accounting date in 2023/24to align with the tax year.

You may also be able to claim overlap relief in 2023/24 if you stopped trading in that year.

It may be that you are able to find your overlap profits from your previous tax returns, entered as ‘Overlap Profit Carried Forward’ on either the self-employment pages (SA103) or the partnership pages (SA104).

If you cannot find your overlap relief figure, you can use the online service to establish your overlap profits – but only if you provided this information in a previous return.

Using the service

To use the service, you will need to sign in with your Government Gateway user ID and password for Self Assessment. Your agent can also use the service on your behalf.

You will need to provide the following information, so it is advisable to ensure that you have it to hand before you start:

• your name;
• the name of your business or a description of it;
• your business address;
• your unique taxpayer reference;
• details of whether your business is a sole trader or a partnership;
• the date that your business started or you became a partner in the partnership (you can provide the starting tax year if you are unsure of the exact date);
• the most recent period of account or basis period used by your business; and
• if you have changed your accounting date, the year or years of the change.

You will also be asked for your contact details and whether you would like a response by email or by letter.

After providing your information you will receive a confirmation email or letter containing your submission reference. HMRC will generally aim to provide details of your overlap relief within three weeks. However, for complex cases, it may take longer.