Every week we take a look at what is trending in the accountancy and tax press and share items that we think will interest you. However, these are only outlines and where they relate to tax planning should not be acted upon without looking into them more completely as everyone’s circumstances are particular to them. You need to take specific advice appropriate to your own circumstances.
While every effort is made to deliver accurate, informative and balanced articles this content is general in nature and should not be used as the sole basis for making decisions.
Extraction of Profits 2026/27 Onwards
A few things are changing that will affect the profit extraction question.
The Autumn Budget froze the personal allowance until 5 April 2031 at £12,570, as well as freezing the UK basic, higher and top rate bands. The Scottish bands for employment income are set by the Scottish Government.
The basic rate of tax on dividends increases to 10.75% in 2026/27 with the higher rate increasing to 35.75%, though the top rate remains at 39.35%.
The primary and secondary NIC thresholds are also frozen until 5 April 2031,
For employees the lower earnings limit is £6708 and this is the minimum you need to earn to be credited with NIC without actually paying NIC.
Employees NIC is actually payable on the earnings between £12,570 and £50,270 at 6%, then 2% on earnings above £50,270.
The employer’s NIC threshold is £5,000, with NIC payable at 15% above this.
Sole Trader V Company
Is it better to be a sole trader or a limited company? If you are already working through a company want is the optimum level of salary to pay yourself?
It used to be that the tax system, although complex, was not as bad as it is today and there have always been various rules of thumb for deciding whether a business was better incorporated or not. That is now almost impossible because of the number of variables.
There are also the extra running costs of running a company (confirmation statement fee, accounts preparation and filing, CT600 preparation and filing) which soon mount up.
You’ll have to take my word for the answer to this question which I found in an article I was reading.
If you have to take out all of the profit to maintain your lifestyle. Then it is generally better to be a sole trader. If you can leave profits in the company for the long term this may make a company more advantageous.
In a company the optimum salary extraction strategy is to pay a salary of 12570 and take out the rest as dividends. A salary higher than £12570 will almost always make you worse off overall.
If profits exist and will need to be extracted in soon, consider extracting them before 6 April 2026 to save 2% tax, rather than after 5 April 2026, unless this would push the owner into a higher tax band.
Retained profit in a company (and the consequent cash) can be realised on liquidation at CGT rates, i.e. 18% or 24% tax but you would need to factor in a liquidator’s costs unless the amount to be extracted is less than £25,000, when basically you can do it yourself.
Other Tax Efficient Ways of Extracting Profit
There are ways to take out profit that mean you do not suffer dividend tax and could be tax free.
– If company owes the director money, the director can charge up to a market rate of interest on the loan. This is a deductible expense for the company, saving tax at 19%, 25% or 26.5%. If a director is taking a £12570 salary and no other general income they will have a £5,000 starting rate band for interest (and possibly a £500 or £1,000 PSA), with an income tax rate of 0%. So the interest could be tax free.
– Additional pension contributions is still very tax-efficient remuneration, being an exempt benefit for the director (up to the annual allowance available), as well as a deductible expense for the company. However, if the owner is not close to pension age, they may not want to use the profits in this way as the benefit will not feel tangible.
– Trivial benefits like going out for birthday or wedding anniversary meals, can be paid by the company using the trivial benefits exemption (up to £300 pa for directors and family of close companies). Alternatively, a birthday or Christmas present of up to £50 in Amazon or other vouchers would qualify for exemption, subject to the £300 rule.
Capital allowances
It is debatable whether the capital allowance regime could be any more complicated. It is intended to give an element of tax relief for certain capital expenditure principally equipment. Capital allowances are deductible from trading income.
The main points are as follows:
Main Pool
This includes plant and machinery such as lower emission cars, and uses an 18% per annum reducing balance basis, meaning it takes many years to claim all costs.
From 6 April 2026, the writing down allowance for the general pool will reduce from 18% to 14%, with apportionment required for non-31 March year ends.
Special Rate Pool
The special rate pool covers long-life assets costing more than £100,000 in a 12-month period, assets integral to buildings like thermal insulation or air conditioning, as well as high emission cars (those emitting more than 50g per kilometre).
The reducing balance calculation is based upon 6% per annum.
Annual Investment Allowance
The Annual Investment Allowance (AIA) of £1,000,000 was made permanent from 2022. This will be sufficient to recover most capital expenditure costs but cannot be used for cars.
Full Expensing
From 1 April 2023 companies can claim 100% first-year capital allowances on qualifying (new and unused) main rate plant and machinery against taxable income in the investment year, significantly accelerating relief to encourage investment in British industry. For assets that would typically fall under the 6% special rate pool, a 50% first-year allowance is available, with the balance potentially entering the pool.
From 1 January 2026 there is a new 40% main rate first-year allowance for general pool assets, available to claimants unable to claim full expensing. This excludes cars, second-hand assets, and assets for overseas leasing but benefits unincorporated businesses using significant assets on a large scale and companies that rent out assets in the UK.
Festive VAT
Business gifts
You may buy goods with a view to giving them to valued customers or possibly staff at Christmas. Such gifts can include alcohol, chocolate etc. and are not restricted in the same way as they are for direct tax purposes.
These are business gifts as they are bought for a business purpose, meaning that the related input tax is recoverable.
Where the cost of the goods gifted exceeds £50 (net), there is a deemed supply and output tax is due. The output tax is normally equal to the input tax recovered.
This £50 limit works on a rolling 12-month basis so you need to consider cumulative gifts to the same person in a 12-month period. If two gifts are given to the same person within a 12-month period and the second gift takes the total over £50, there will be a deemed supply at the time of the second gift, calculated on the value of the two gifts combined.
Business entertainment
Business entertainment includes providing hospitality of any kind in connection with your business client and so includes meals, a client golf day, football hospitality etc.
However, it does not include the provision of entertainment for either or both:
- employees of the taxable person; or
- if the taxable person is a company, its directors or persons engaged in the management of the company;
Input tax relating to employee entertaining is recoverable but not when connected with a client event. HMRC regard an employee as including:
- directors or anyone engaged in the management of the business (including partners);
- self-employed persons treated by the employer in the same way for subsistence purposes as an employee; and
- helpers, stewards and others essential to the running of sporting or similar events
Overseas clients
VAT incurred on the entertainment of overseas customers can be recovered.
Vouchers
A voucher is a physical or electronic instrument in relation to which the following conditions are met:
- One or more persons are under an obligation to accept the instrument as consideration for the provision of goods or services;
- The goods and services and/or the consideration are limited and are stated on or recorded in the instrument or the terms and conditions;
- The instrument is transferable by gift (whether or not it is transferable for consideration).
2 Types of vouchers
These are:
- A single purpose voucher is a voucher where, at the time it is issued, the following are known:
- The place of supply of the relevant goods or services, and
- Any supply of relevant goods or services falls into a single supply category.
- A multi-purpose voucher is any voucher that is not a single purpose voucher.
Single purpose voucher
When the voucher is originally sold, it is a single purpose voucher and output tax must be accounted for at that time. When the voucher is then used no further output VAT is accountable on the value covered by the voucher,
Multi-purpose voucher
At the time the voucher is sold, it is not known what items will be bought and so no output tax is accounted for when the voucher is sold. If the voucher plus cash is later used to buy standard rated goods, output tax must be accounted for on the full consideration of the purchase.
Finfluencers
These are financial influencers operating on social media. The term will be more common in the future and these people, some of them accountants and lawyers, some not, point out ways to “save” tax. Much the same as us!
90% of MTD First Cohort
A representative of HMRC recently stated that 81,000 taxpayers have signed up for the digital project. Which is less than 10% of the first cohort.
864,000 individuals are expected to come into the first tranche of Making Tax Digital. Most of the rest will catch up as deadlines approach but inevitably some will miss the deadline.
But the big issue is the second year where far more people will be affected by MTD IT when the eligibility threshold drops to £30,000.
As confirmed in the Autumn Budget, taxpayers joining MTD from April 2026 won’t be penalised for late filing in the first year. However, HMRC will be writing to those customers, so it won’t be a penalty, but there will be a letter in the dreaded manila envelope.
£137m in Late Payment Interest
In 2023/24 HMRC charged 1.3 million taxpayers late payment interest raising £137m in a single tax year. The average interest payment was just over £100.
Late payment interest was hiked from 6 April 2025 to base rate plus 4% when it had previously been base rate plus 2.5%.
But these figures are likely to increase as HMRC only counts taxpayers once the interest accrued or late filing penalty have been paid.
HMRC £16bn tax from Big Corporates
HMRC collected £15.8bn in additional tax from 2,000 business in 2024-25.
In 2025, the NAO said HMRC was investigating the tax affairs of around half of large businesses at any one time with a potential £52.6bn in potential taxes at stake.
Nearly half covered three business sectors, banking, telecommunications, and retail. Banking had £8.6bn tax under consideration, telecoms had £7.8bn, and retail had £7bn.
The yield in 2024-25 exceeded the yield achieved in every year since 2017-18.
The NAO said that HMRC’s compliance work with large businesses offers good value for money.
Questions?
If you have any questions about any of these, you know where to find us. If you prefer, just give me a ring on 07770 738770 or email me at alan.long@thelongpartnership.co.uk.
