The timing of payments and receipts around your year end can bring a tax deduction forward by a year, and sometimes reduce the total tax paid. But it only works where the rules link the deduction to the date of payment or purchase. Spending money you did not need to, or moving invoice dates, rarely helps.
The rules differ depending on whether you run a company or are a sole trader using the cash basis, so it pays to know which apply to you.
How companies are taxed
Companies are taxed on the accruals basis. Income is counted when it is earned and costs when they are incurred, not when cash moves. Moving an invoice from 31 March to 1 April does not change which year the income belongs to if the work was done in March.
Some items are exceptions, and these are where timing matters.
The dos
- Pay pension contributions before the year end. Company contributions are deductible only when paid. An accrual is not enough.
- Accrue bonuses properly. A bonus is deductible in the year it relates to if it is accrued in the accounts and paid within nine months of the year end. The decision should be made, and ideally minuted, before the year end.
- Buy equipment you need before the year end. Capital allowances are generally given for the period the expenditure is incurred. With the £1 million Annual Investment Allowance or full expensing, a purchase on the last day of the year can be fully deducted in that year.
- Think about the rate band. Profits between £50,000 and £250,000 are taxed at an effective marginal rate of 26.5 percent. Bringing a deduction into a year with profits in that band saves more than in a year taxed at 19 percent.
A worked example
A company expects profits of £60,000 for the year to 31 March 2027. Corporation tax on £60,000 is £12,150.
The director decides to make a £20,000 company pension contribution. If it is paid on 25 March, profits fall to £40,000 and corporation tax falls to £7,600. That is a saving of £4,550 in this year.
If the contribution is only paid on 10 April, there is no deduction for the year to 31 March 2027. It falls into the following year instead, where the saving depends on next year's profits.
The don'ts
- Do not spend money just to save tax. A deduction at 25 percent still leaves the business paying 75 percent of the cost.
- Do not rely on prepayments. Paying next year's rent or subscriptions early does not bring the deduction forward for a company. The cost is matched to the period it relates to.
- Do not backdate documents. Board minutes, invoices and contracts must reflect what actually happened and when.
- Do not forget dividends do not reduce profit. Paying a dividend before the year end has no effect on corporation tax.
- Do not assume a car qualifies. Cars never qualify for the Annual Investment Allowance. Only new zero-emission cars get a 100 percent first-year allowance.
Sole traders on the cash basis
Since 2024/25, the cash basis is the default for sole traders. Income is taxed when received and expenses deducted when paid. That makes timing more direct: paying a supplier on 4 April rather than 7 April moves the deduction into the earlier tax year.
Equipment purchases, other than cars, are usually deducted when paid for. The same caution applies. Only buy what the business needs, and do not delay banking customer receipts artificially.
Personal timing
For directors, the date a dividend is paid decides which tax year it falls into. Spreading dividends across two tax years can keep income within the basic rate band in both. Personal pension contributions and gift aid payments count in the tax year they are paid.
What to do
- Review profits two to three months before your year end, not after it.
- Pay any planned company pension contributions before the year end.
- Agree and record bonuses before the year end, and pay them within nine months.
- Schedule necessary equipment purchases with the year end in mind.
- Plan dividend dates around both tax years.
If you would like a pre-year-end review of your position, book a free call.
