End of year tax planning

As the 2021/22 tax year draws to a close, there are some simple tax planning opportunities that you may want to take advantage of before the possibilities end on 5 April 2022.

Income Tax free allowances

Making sure that you use the tax free allowances available to you is an important tax planning tool.

Director shareholders with their own companies have control over their income and should check they have utilised their tax free allowances taking a salary up to their personal allowance, making use of the £2,000 tax free dividend allowance and making use of interest exemptions if the said director shareholder has lent money to the company e.g. capital injection on set up.

If you do not have a loan agreement in place and/or need advice on amounts to pay yourself and fellow directors to ensure that the most tax efficient scenario is reached, let us know.

Company owners can even draw out enough income to take the tax bracket up to the higher tax rate, then leave the net amount in the company so it is available to take out tax-free in the future. This means if there is a year where more cash is needed than usual e.g. a big lifetime event, holiday or home improvements, there is no need to be pushed into higher tax brackets if there is some tax-free cash sitting in the director’s loan account.

If your spouse or civil partner has little or no income, you might want to consider the ownership of income-producing assets. This may involve redistributing income-producing assets to minimise the couple’s tax liability – but be mindful of the settlements legislation governing ‘income shifting’. Any transfer must be an outright gift, with ‘no strings attached’.

Capital Gains

Apart from income allowances there is a capital gains exemption of £12,300 in 2021/22 which allows for assets, such as shares, to be sold for a tax free profit (gain) provided your total chargeable gains are within £12,300. Most investment managers do utilise this allowance but if you manage your investments yourself you may like to bear this in mind. If you have various capital assets you wish to sell you may want to sell some in this tax year and some in the next tax year to ensure you get the most out of your exemptions.

There is legislation regarding linked transactions and where a receipt is ascertainable to take into consideration though so it is best to get advice before you sell.

Pensions

As a director of your own company, if you have a pension that you make contributions to via the company, it is worth considering making a transfer before the tax year end. Speak to your pension provider or IFA to ensure this is done correctly and within your annual allowances. We can also provide advice on what annual allowances you have brought forward. Any payment will be tax deductible for the company and so saves corporation tax, whilst continuing to be a tax-free benefit from an income tax point of view.

If you pay into a pension personally, it is also worth checking if you have scope within your annual allowance and any brought forward allowances to top your pension up before the tax year ends. If you can make payments and have the funds to, there is tax relief at higher rate for your gross contributions. Again you should discuss this with your IFA or pension provider.

Trivial benefits

It is worth looking at the Trivial Benefit rules for your employees or for yourself if you are a director of a company. No income tax is paid by an employee on benefits received if all of the following apply:

-it costs you £50 or less to provide
-it isn’t cash or a cash voucher (note: a cash voucher is not a gift voucher that cannot be exchanged for cash)
-it isn’t a reward for their work or performance
-it isn’t in the terms of their contract.

This also means the company does not pay National Insurance on these benefits and still gets a corporate tax deduction.

For directors of close companies, trivial benefits are limited to £300 a year, but this is still a good way to extract money from the business tax-free.

Charitable donations

Gift aid donations to charity give tax relief at your highest marginal tax rate. Donations can be carried back a year so it is worth considering which year to make a payment in if you have a donation or sponsorship payment to make around this time or if you are considering an annual subscription to a charitable trust.

Inheritance tax

Gifts of £3,000 can be made annually with no impact on the nil rate band of £325,000 or inheritance tax charge. If you don’t reach the £3,000 limit in one tax year, the balance can be carried forward, but only for one tax year. There are also reliefs on gifts to any one person of up to £250 annually and gifts out of the transferor’s excess income, although, as ever, various conditions have to be met.

EIS, SEIS, VCT and SITR investments

There are various tax advantages to be gained from making investments within the following categories: enterprise investment scheme (EIS), seed enterprise investment scheme (SEIS), venture capital trusts (VCT) and the social investment tax relief (SITR).

Given the nature of these investments and that they have very specific conditions which must be met, it is important to seek advice before committing your money. Income Tax relief is the main draw to investing in such products but there is also a capital gains tax deferral and part exemption rule for some investments which is also very attractive.

Other Investments

Investments can also be placed in tax efficient wrappers, many of which have annual limits and a cut-off date of 5 April each year. This can include payments into your pension or an ISA and it is worth taking advice from a professional such as an Independent Financial Adviser to ensure that you get the most out of these investments.

The 2021/22 overall limit for ISAs is £20,000. This can be invested in cash or stocks and shares. Any income or gains arising from the investments will be tax-free.

If you need any advice or would like any clarification on this, please call us or email hello@gandertaxservices.co.uk.