With the rate of inflation an ever-present concern for businesses as it impacts operational costs, there is another concern brought about by inflation.
Fiscal drag, the occurrence where a financial threshold is crossed due to inflation rather than any real-world growth, is a looming concern for many business owners.
Some of the most important tax thresholds have been frozen, so strategic financial forecasting could be the key to minimising the impact of fiscal drag.
Corporation Tax is one of the places where fiscal drag is a key concern.
Established alongside the new Corporation Tax rate in 2023, a relief window for businesses with profits between £50,000 and £250,000 has remained unchanged.
What has been a welcome relief is being hindered by fiscal drag, pushing businesses into higher rates of Corporation Tax.
Earnings within the window have the full 25 per cent Corporation Tax rate reduced by a marginal relief.
However, some growing businesses are losing out on that relief as they are pushed past the £250,000 threshold without a change in real-world value or profitability.
Likewise, smaller businesses that would typically pay 19 per cent Corporation Tax may find themselves pushed past the £50,000 threshold.
While the relief window alleviates some of the burden, it does not compensate for the increase in Corporation Tax demands compared to real-world value.
As such, companies could be making the same real-world money as they were last year, but are now subject to higher rates of tax.
The VAT threshold is also not sufficient to prevent fiscal drag.
A small increase from £85,000 to £90,000 in 2024 has done little to prevent inflation pushing businesses across the threshold.
By crossing this threshold, businesses are subject to additional administrative duties as well as the increased financial obligations that would typically be reserved for higher-value companies.
While fiscal drag cannot be completely avoided, the impact can be lessened.
Smart financial forecasting helps businesses understand when fiscal drag is going to impact them and thus make plans accordingly.
By preparing for increased taxation, a business can maintain better fiscal health.
Seeking professional advice is advisable for any business that is close to a threshold as fiscal drag will likely impact sooner rather than later.
Five-year forecasting combined with tax-efficient investments are key ways of freeing up other finances to offset some of the challenges imposed by fiscal drag.
Having a good understanding of the financial state of a business is the best way to keep a company dynamic and adaptable, particularly in these turbulent economic times.
Anyone who engages with the business’s finances should clearly communicate with each other so that a reliable picture of the company’s financial health can be created.
Alongside this, our team are on hand to help you manage your finances so that fiscal drag does not become too disruptive.
Don’t let fiscal drag hold your business back. Speak to our team today!
