As the 2019/20 tax year draws to a close, there are some simple tax planning…
With a late spell of wintry weather it would be easy to overlook that spring is supposed to be here! Whilst a new tax year is not widely celebrated it does mean that tax opportunities for the year about to end will only remain available for a short while longer. The current tax year ends on 5 April 2018.
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. If earned income, from all sources, is less than £11,500 any balance can be taken as salary via the payroll. This is tax free unless you also receive taxable benefits in kind e.g. medical insurance, gym membership or a company vehicle, as these have values that reduce the £11,500. National Insurance is payable on earnings over £8,164, with contributions from the employee of £400.32 and £460.37 from the employer being due on a salary of £11,500.
There is also a tax free allowance for interest received. Those with a company can charge interest on any funds lent by them to the company to use this tax free allowance, whilst all taxpayers can use this against their bank and building society interest. Interest of £1,000 (£500 for higher rate taxpayers) is tax free, so it is worthwhile ensuring that cash is held in interest bearing accounts and the best rate of interest is obtained. For taxpayers whose total non-savings income is less than £11,500, up to £5,000 of interest can also qualify for a 0% tax rate.
Also available for all personal taxpayers is the tax free allowance for dividends. This allowance is currently £5,000 but due to reduce to £2,000 from 6 April 2018. For shareholders who can influence when dividends are paid it may be worth ensuring that a dividend is paid by 5 April 2018, for other investors it may be worth reviewing your investments to ensure that this allowance is being used.
Personal taxpayers can also benefit from new allowances for trading income and property income available from 6 April 2017. In simple terms, trading income (e.g. selling on internet sites) and property income (such as the rental of a driveway or garage) below £1,000 each is tax free.
Apart from income allowances there is a capital gains exemption of £11,300 in 2017/18 which allows for assets, such as shares, to be sold for a tax free profit (gain) provided your total chargeable gains are within £11,300. Most investment managers do utilise this allowance but if you manage your investments yourself you may like to bear this in mind. It is also worth considering when you sell a capital item if you are considering a sale around this time of year. However, delaying a sale for a few weeks could give you an extra year before any tax is due to be paid over.
Those with residential non-holiday rental properties financed through borrowing (e.g. with mortgages) should also be aware that the transition to limited tax relief on interest paid, which started on 6 April 2017, steps up again on 6 April this year. If you are a higher rate tax payer or relied on the finance interest deduction to keep you in lower rates, this will mean an increase in tax. It is worth getting advice regarding the structure of how property is held if this law change will affect you.
Things to consider would be setting up a company to hold your property in, transferring some beneficial interest to a lower tax paying spouse or even selling some property.
On the subject of property income there is a very generous allowance enabling you to receive up to £7,500 tax free for the letting of furnished rooms in your home. If you are letting out a room it is worth checking whether this rule applies to your situation.
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. 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.
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
- 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 (for example, it could cover the cost of Christmas presents for certain family members).
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.
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.
If you would like to invest in any of these products you will need to speak to an IFA as soon as possible especially for higher rate tax payers. We can happily look at your tax situation and advise on the best timing for maximum tax efficiency and can also provide details of IFAs who deal with these products on a day-to-day basis.
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 2017/18 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 are aged between 18 and 40, you may consider opening a Lifetime ISA (LISA). An individual can contribute up to £4,000 per tax year while under 50 and receive an additional 25% Government bonus. This means for every £4 contributed, the Government will add a further £1, worth up to £1,000 a year. A LISA can also be used to help fund your first home. LISA contributions count towards an individual’s annual ISA contribution limit but any bonus received does not.