Year end tax planning
What should I do before 5th April
Before each tax year end you should consider what steps you can take to invest tax efficiently, or reduce your tax payments.
It is important you act before 05 April to protect yourself.
Pensions
Over a series of articles (see link below) we have been looking at how you can protect your future financial position through pensions. As this is “topical” let’s start with topping up your pension contributions. As we have explained previously, there are various options, far too many to go into here. Pensions are a highly effective way of saving and getting tax relief at the same time. Depending on your earnings you can invest up to £40,000 in pensions each tax year. And generally, the investment grows in a tax-free fund.
If you are already at pension age, you now have flexible options for “drawdown”. If you get the timing right, depending on your level of income, you can avoid falling into higher rate tax. This is a complex area you should get advice about from someone properly qualified, like an IFA.
Think about making a contribution of up to £3,600 each year for members of your family, even for those who do not have any earnings.
You can also make pension contributions in respect of family members who do not work (i.e. have no relevant earnings) or cannot afford them.
Corporation tax
The company profits tax rate is 19%, due to go down to 17% from 01 April 2020. Best advice generally is to defer profits where possible. But don’t do things just to save or defer tax. As we say – “don’t let the tax tail wag the dog”!
But for example, if you need to buy some new machinery, or change your company car, do it before your business’s year-end (note – not 05 April).
Consider paying yourself a bonus, if this is your own business. That needs to be balanced to take account of your cash flow requirements, although there are ways of “paying” a salary for tax purposes, but not withdrawing it. The payroll tax on the bonus would normally be payable at the time though – but this could still create an overall saving. At the same time take into account your personal income position and higher rates of tax.
Income tax
Look at what your current level of income is. Take account of all earnings, but also rental income and dividends. Many small company businesses are structured tax and NI efficiently so that the owners receive most of their income as dividends.
Each individual taxpayer has a tax free personal allowance of £11,500 and then this tax year the next £33,500 is taxed at 20%. Above that higher rate tax is at 40% until you reach £150,000 of income when you pay tax at 45%.
The personal allowance is reduced by £1 for every £2 of income above £100,000. There is, therefore, no personal allowance at all where income exceeds £123,000. This also means that, over the income band £100,000 to £123,000, the effective rate of income tax is a heady 60%. Therefore if you are lucky enough to have income around that tax band – do all you can to keep yourself out of it. Do things like defer income – especially dividends, or make pension contributions to reduce your taxable income. Again this is a really complex area and your accountant should advise further.
Child benefit
Where either partner in a relationship has income in excess of £50,000, child benefit is clawed back from the person with the higher income £1 for each £100 until it is all clawed back through self-assessment at £60,000. You may not know what your partner is earning! But if you can discuss this and avoid this trap by arranging things differently, then you can save yourself from this tax trap.
Dividends
On the one hand, defer dividend withdrawals to keep yourself out of the next tax band. On the other, this year only, there is a one-off opportunity to take at least £5,000 of dividends tax-free. From after 05 April 2018 the annual dividend allowance reduces to £2,000.
Capital gains
The annual exempt amount this year is £11,300. If you have not already used the exemption up and have unrealised gains that you can crystallise, then you should do so before 05 April. Note that you cannot “bed and breakfast” share sales, although you can purchase shares back effectively through an ISA.
Alternative investments
Please take independent advice, but if you have the means, consider alternative tax-efficient investments, including ISA’s, VCT’s and EIS shares.
Inheritance tax
The nil rate band is £325,000. There are various exemptions including an annual exemption of £3,000 per annum, lifetime giving, small gifts etc. Higher rate taxpayers can also make charitable donations tax efficiently. There are many planning possibilities on which detailed advice is required.
There are many ways of planning your future and saving tax. Please take specialist advice before you act.
For further advice existing clients email us at support@anytime.uk.com or call 03333 110 230
For new enquiries contact us now
Related Blog
Who is protecting your future – part 4
How much can I invest in a pension In this series of articles, we will try to explain your options and clear some of the minefields for you. We are not pension advisors – we are accountants. We do not sell pensions and have no vested interest, other than helping our clients protect themselves financially. — Read more
