At the start of a new tax year, there are some considerations sole traders and partnerships should make when it comes to tax planning over the next 12 months.
Firstly, what are you aiming to achieve? Lower profits may mean a lower income tax bill, but that isn’t necessarily the best result for the business.
There are some reasons you may want to show a higher profit and pay more tax.
For example, the performance of your business and the profit share taken from it will affect your mortgage options. In the same way, lenders will consider the profits of the business when looking at repayment/affordability.
Considering capital allowances and pension contributions can help mitigate your income tax liability.
Capital expenditure
To claim capital allowances on assets, they must be delivered and in use.
On most plant and machinery, fixtures and fittings, 100% relief is given up to a limit of £1 million under the Annual Investment Allowance (AIA).
It is also important to remember that disposals made before or after the end of your accounting period may affect the taxable profit.
If you’re looking to purchase a new car, be aware that cars don’t always get 100% allowances.
New cars with CO2 emissions of 0g/km qualify for 100% first year allowances. Second-hand electric cars generally qualify for 18% of the car’s value.
Cars with CO2 emissions of 50g/km or less also qualify for 18% of the car’s value, whereas cars with CO2 emissions over 50g/km qualify for 6% of the car’s value.
Double Cab Pick-ups (DCPU) no longer qualify for AIA and instead will be subject to the same capital allowances as those above.
Pension contributions
If you’re a higher-rate taxpayer, you may be eligible to make pension contributions to extend your Basic Rate band.
To impact the 2026/2027 tax return, payments must be made in your pension by 5 April 2027.
We would recommend you speak to your financial adviser before making any contributions, as there are a number of factors to be taken into consideration.
Expenditure that will not affect profits
Spending on matters that don’t happen until after the year-end or on products that are in stock at the year-end won’t reduce the current year’s profits.
Meanwhile, the purchase of land does not attract any income tax deductions.
