The director/employee tax planning approach around income levels applies equally to people who are self-employed.

If you are self-employed, you might be able to affect the timing of your taxable profits to avoid paying tax at 45% (47% in Scotland), but this will depend on your accounting date.

Complicating matters in 2023/24 is the transition to taxation of business profits actually arising in the tax year. This has impacted those not currently on a 5 April/31 March year end. For 2023/24, taxable profits are based on the 12 months from the end of the 2022/23 basis period, plus a transition component running from the end of this 12-month period to 5 April 2024. For 2024/25, taxable profits will be those arising in the tax year itself.

Any additional profits arising from the transition are spread over a five-year period, but businesses can opt out of spreading. Any decision on spreading profits should take into account that the personal allowance and higher rate thresholds are frozen, and also that the class 4 NIC main rate is 1% lower from 2024/25 onwards.

Partner's salary

You could pay an otherwise non-earning partner a salary, on which you will get tax relief. You normally must keep PAYE records even if the salary is below the NICs limit, which is £533 a month in 2023/24. If, however, the salary is between £533 and £1,048 a month, your partner will avoid paying any employee NICs, but will still qualify for state benefits. A small amount of employer NICs will be payable if the salary exceeds £758 a month.

You can also pay an employer's contribution to your partner's personal pension plan. There are no taxes or NICs on the payment itself, and it should be an allowable business expense. However, the total value of your partner's salary, benefits and pension contributions must be justifiable in relation to the work performed.

Alternatively, you could plan ahead to share the profits of your business by operating as a partnership in 2024/25. You both need to be genuinely involved as business partners, though not necessarily equally.

Planning point

With corporation tax charged at 25%/26.5% once company profits reach £50,000, there are now fewer tax advantages to running a business as a limited company than was previously the case. If you are considering incorporation, you need to carefully weigh up the tax and other advantages and disadvantages of taking this step.

Useful link: Helpful advice for businesses.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.