Simple ways to reduce your taxes
Anytime accountants help you manage your tax and finances
What should I do before 5th April
We are starting the run up to the tax year end and it’s time to consider what steps you can take to invest tax efficiently, or reduce your tax payments.
It is important you act NOW before 05 April to protect yourself.
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 tax payer has a tax free personal allowance of £11,850 (going up for 2019/20 to £12,500) and the next £34,500 is taxed at 20% (2019/20 – £37,500). 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. The tax is 1% of the amount of child benefit for each £100 of income on a sliding scale between £50,000 and £60,000. For those earning more than £60,000 the charge is 100% – in effect, they receive no child benefit. 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
Defer dividend withdrawals to keep yourself out of the next tax band but try to use the annual dividend allowance of £2,000.
If you already have higher dividend income, look at transferring shares into an ISA where the dividends are tax free.
Capital gains
The annual exempt amount this year is £11,700. 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.
You can generally contribute up to £20,000 to a stocks and shares ISA each tax year and there is no UK income or capital gains tax to pay on the investments. The ISA grows tax free.
Pensions
As we have explained in detail here, there are many opportunities and options. 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.
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 make pension contributions in respect of family members who do not work (i.e. have no relevant earnings) or cannot afford them. A non-earner can make a £2,880 pension contribution and the government adds £720 in tax relief, even if the individual pays no tax.
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 tax payers can also make charitable donations tax efficiently. There are many planning possibilities on which detailed advice is required.
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 your 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.
Anytime is here to assist, quickly and efficiently. We are a member firm of the Institute of Chartered Accountants. Whatever you need – speak to us. We should always be able to point you in the right direction.
There are many ways of planning your future and saving tax. Please remember that each individual’s circumstances will be different and therefore you should take personalised advice before making any decisions.
As specialist accountants Anytime keep our clients informed and help manage their finances.
For further advice existing clients email us at support@anytime.uk.com or call 03333 110 230
For new enquiries contact us or call now on 03333 110 103
