Extracting further profits in 202324

The end of the financial year is often a moment of reflection—but it’s also a moment of opportunity. If you’re running a business in the West Midlands or beyond, there are genuine, legitimate ways to improve your bottom line before 5 April 2024. Whether you’re a sole trader, partnership, or limited company director, the question isn’t whether to plan ahead, but how to do it effectively. This post covers some practical strategies that could make a real difference to your 2023–24 profits.

Timing Your Income and Expenses

One of the most straightforward ways to optimise profit is to review when money comes in and goes out. For cash basis traders (those with turnover under £150,000), this is especially relevant. By deferring invoices until after 5 April, or bringing forward supplier payments, you can shift profit between tax years—perfectly legitimately.

For accruals basis businesses, the picture is a bit different but no less important. Make sure you’ve recorded all expenses incurred by the year-end, even if the invoice hasn’t arrived. Accrued expenses reduce your taxable profit. Equally, if a large receipt is genuinely due after 5 April, don’t rush to record it early.

This isn’t about dodging tax; it’s about recognising when transactions actually happen under the rules HMRC expects you to follow.

Claiming All Available Allowances and Reliefs

Many business owners leave money on the table simply by not claiming everything they’re entitled to. Here are some reminders:

Capital Allowances: If you’ve bought equipment, vehicles, or machinery, you may claim Writing Down Allowances (WDA) at 18% per annum on the main pool. There’s also the Annual Investment Allowance (AIA), which currently allows £1 million of plant and machinery to be written off in full in a single year. If you’ve made purchases in 2023–24, ensure they’re captured.

Trading Allowance: If you’re self-employed with turnover below £1,000, you can claim the £1,000 trading allowance automatically—it’s one of the easiest wins out there.

Gift Aid: If your business donates to charity, those donations are corporation tax deductible (for limited companies) or deductible against trading income (for sole traders and partnerships).

Home Working: If you work from home, claim the statutory allowance or a more precise figure based on actual costs. HMRC publishes simple guidelines, and this is a genuinely overlooked area.

Director Salary and Dividend Planning (Limited Companies)

If you run a limited company, how you extract profit matters a lot for tax efficiency. The classic approach is to balance salary against dividends.

For 2023–24, paying yourself a salary of £12,570 (the personal allowance threshold) is typically sensible—you get no Corporation Tax or Income Tax charge, and you satisfy National Insurance thresholds. Anything above that is usually more tax-efficient taken as a dividend.

Dividends are taxed at 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate) after the £500 dividend allowance. That’s often more efficient than salary, which incurs both employee and employer National Insurance. However, don’t neglect the fact that profits must exist in the company to pay dividends—and Corporation Tax at 25% (for profits over £250,000) or 19% (for profits under £50,000, with marginal relief between) comes first.

Pension Contributions

Whether you’re self-employed or a company director, contributions to a registered pension scheme are tax-deductible and can significantly reduce your tax bill.

For self-employed individuals, contributions reduce trading income. For company directors, contributions are a company expense, reducing Corporation Tax liability. The annual allowance is £60,000, though this may be different if you have higher previous unused relief.

Beyond the tax saving today, pension contributions are a long-term investment in your retirement—often a win-win.

Review Your VAT Position

If you’re VAT registered, ensure you’ve claimed all eligible input tax. If you’re on the margin, consider whether remaining unregistered (if turnover allows) might suit your business better. The VAT registration threshold is currently £85,000. Being slightly below it saves you administration; being slightly above it might still be worthwhile if your input tax recovery is strong.

Next Steps

Profit extraction isn’t a one-size-fits-all exercise—your circumstances, business structure, and longer-term goals all matter. What works brilliantly for a limited company director might not suit a sole trader, and vice versa.

The good news is that with a few weeks left in the tax year, there’s still time to act. A quick conversation with your accountant can often uncover overlooked opportunities.

For tailored advice, contact Severn Accounting — we’re here to help.