Strong profits – a nice problem to have

We are seeing dairy farms experiencing strong profits in 2024–25, and this positive trend is expected to continue—provided weather conditions remain favourable. At the time of writing this I should be doing a rain dance as consistent rainfall to support grass growth is essential for costeffective milk production.

Other key driving factors include, a stable farmgate milk price, together with feed and fertiliser costs coming back from the dizzy heights of 2022–23. This is great news for the industry and, while paying tax is an unavoidable part of financial success, the focus should be on ensuring you’re comfortable with the rate at which you are paying it.

Farmers averaging, which allows sole traders and partners to spread their profits over 2 or 5 years for tax purposes, may still prove useful in 2024-25. However, many will have consistently utilised at least their basic or higher-rate tax brackets and could be facing future tax liabilities at an unpalatable rate.

1. Transfer part or all the business into a limited company

• A potential way to reduce your effective tax rate to a maximum rate of 25% compared with >45% personally
• Suitable for consistently profitable businesses with clear reinvestment plans so that not all cash needs to be withdrawn.
• Advice needs to be taken holistically – engaging with your milk supplier and bank, while also considering the potential inheritance tax, capital gains tax and stamp duty land tax implications is crucial.

2. Spread the income across more people

If you have family members contributing to the business, are they being properly remunerated or could income distribution be justifiably spread wider, such as by:

• introducing new partners into the business
• starting or increasing wages or contracting charges
• paying increased rents to some of the landowners

3. Capital Allowances (CA’s)

• CA’s allow 100% tax relief on qualifying plant, machinery, and infrastructure investments such as milking systems or slurry storage up to £1m, so consideration should be given to plans in the next 5 years
• Future proof your business with compliant and efficient slurry storage and silage clamps
• Don’t spend just to save tax - even if you are saving tax at >45% you still need to finance 100% of the investment in the short term and 55% in the medium term
• Align spending with your year end and check the small print! If it is on HP it needs to be in use by the year end

4. Pension Contributions

• Personal pension contributions extend your thresholds for paying tax at the basic rate and higher rate saving tax at 20%.
• They help you plan for the future allowing you to retire from the business and the next generation to succeed to the business (and assets) prior to any emergency inheritance tax planning

While we can recommend making pension contributions for tax purposes, we cannot advise on specific pension products. However, our financial planning team can assist here so please do get in touch if this is of interest.