Year-end tax planning checklist for limited company directors

Understanding Your Company Year-End

Your company's year-end, also known as its accounting reference date, is a crucial point for tax planning. It marks the end of your financial year, after which your company's taxable profits are calculated. Taking action before this date allows you to implement strategies that can reduce the tax your company pays and, in turn, your personal tax burden.

Corporation Tax rates for 2026/27 are 19% on profits up to £50,000 (the small profits rate) and 25% on profits over £250,000 (the main rate). For profits between £50,000 and £250,000, marginal relief applies, resulting in an effective tax rate of 26.5% in this band.

Key Tax Planning Strategies

Director's Salary and Dividends

Reviewing your remuneration strategy before year-end is vital. Most directors take a small salary up to the National Insurance (NI) threshold and extract further profits as dividends.

Consider the following for the 2026/27 tax year:

• Personal Allowance: The standard Personal Allowance is £12,570, meaning you don't pay Income Tax on earnings up to this amount.
• Dividend Allowance: The tax-free dividend allowance is £500.
• Dividend Tax Rates: From 6 April 2026, dividend tax rates are 10.75% for basic rate taxpayers, 35.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers.
• Timing Dividends: If you have flexibility, consider when to declare dividends to make the most of your personal allowances and lower tax bands, especially given the dividend tax rate increases from April 2026.

Pension Contributions

Making pension contributions through your company is often one of the most tax-efficient ways to extract profits.

• Company Contributions: Your company can contribute directly to your pension, and these contributions are generally treated as an allowable business expense, reducing your company's Corporation Tax liability.
• Annual Allowance: The annual pension contribution limit is £60,000 for 2026/27. You may also be able to carry forward unused allowances from the previous three tax years.
• No Salary Limit: Unlike personal contributions, company contributions are not limited by your salary, making them particularly attractive for directors who take a low salary and high dividends.

Capital Allowances

If your company has purchased assets like machinery, equipment, or vehicles, you can claim capital allowances to reduce your taxable profits.

• Annual Investment Allowance (AIA): The AIA provides 100% tax relief on qualifying plant and machinery expenditure up to £1,000,000 per year. This can significantly reduce your Corporation Tax bill in the year of purchase.
• Full Expensing: For companies, full expensing offers 100% relief on qualifying new main rate plant and machinery with no monetary cap.
• Writing Down Allowances (WDAs): For expenditure not covered by AIA or full expensing, or for assets like cars (which are generally excluded from AIA), you can claim WDAs. From 1 April 2026, the main pool WDA rate is 14% on a reducing balance basis.
• New 40% First Year Allowance (FYA): Introduced from 1 January 2026, this allows companies to claim a 40% first-year allowance on qualifying main rate plant and machinery expenditure, particularly useful if AIA is fully utilised or unavailable.
• Structures and Buildings Allowance (SBA): You can claim 3% per year on qualifying construction or renovation costs for non-residential structures and buildings.

Director's Loan Accounts

Careful management of your Director's Loan Account (DLA) is essential to avoid unexpected tax charges.

• Repay Overdrawn Balances: If your DLA is overdrawn (meaning you owe the company money), aim to repay it within nine months and one day of your company's year-end. If not, your company will face a Section 455 Corporation Tax charge, which is 35.75% of the outstanding balance for loans not repaid by April 2026. This tax is refundable once the loan is repaid, but it ties up company cash.
• Loans Over £10,000: If your DLA exceeds £10,000 at any point in the tax year and the company doesn't charge interest at HMRC's official rate (3.75% for 2026/27), it creates a 'Benefit in Kind'. This must be reported on a P11D form, and the company may have to pay Class 1A National Insurance.
• Avoid "Bed and Breakfasting": HMRC has rules to prevent repaying a loan just before the year-end and immediately re-borrowing it. If you repay and re-borrow within 30 days, it may be treated as if the loan was never repaid.

Trivial Benefits and Expenses

Make sure you're utilising all available tax-free benefits and claiming all allowable expenses.

• Trivial Benefits: You can provide employees (including directors) with small non-cash gifts, known as 'trivial benefits', without incurring tax or National Insurance. Each benefit must cost £50 or less, not be cash or a cash voucher, not be a reward for work, and not be contractual. For directors of close companies, there's an annual cap of £300 per director.
• Allowable Expenses: Ensure all legitimate business expenses are recorded and claimed. This reduces your company's taxable profit. Your accountant can help identify all allowable expenses relevant to your business.

Reviewing Your Records

Before your year-end, take time to review your financial records.

1. Reconcile Bank Accounts: Ensure all company bank accounts are reconciled up to the year-end date.
2. Review Sales and Purchase Ledgers: Check for any outstanding invoices or bills that need to be processed.
3. Verify Payroll: Confirm all payroll entries are correct and up to date.
4. Gather Expense Receipts: Organise all receipts for business expenses, especially those paid personally and due for reimbursement.
5. Check Asset Register: Update your asset register for any new purchases or disposals to ensure capital allowances are correctly claimed.

Common mistakes

• Missing the DLA repayment deadline: Failing to clear an overdrawn Director's Loan Account within nine months and one day of the year-end, leading to a Section 455 tax charge.
• Not claiming all capital allowances: Overlooking eligible expenditure for AIA, full expensing, or writing down allowances, resulting in a higher Corporation Tax bill.
• Incorrectly classifying expenses: Treating personal expenses as business expenses, which can lead to HMRC penalties.
• Ignoring the dividend allowance: Not planning dividend payments to make the most of the £500 tax-free dividend allowance.
• Late record-keeping: Leaving all financial record-keeping until after the year-end, making it harder to implement timely tax planning strategies.