With the 5 April tax year end approaching now is a good time to review your personal ﬁnances and how to minimise your tax liabilities. It may seem like a recurring theme but there are usually opportunities, large or small, which can make a diﬀerence.
Ensuring you have the correct business structure can be one of the most important tax planning opportunities. Use of a partnership or limited company may help ensure more income is taxed at lower rates.
If you run your business through a limited company, following a reduction in dividend allowance in April 2018, you will be able to extract the ﬁrst £2,000 of dividend income tax free, irrespective of what non-dividend income you have.
Pensions remain one of the most tax eﬃcient ways to save. You receive a 20% top-up from the government on any contributions you make personally and you also extend your basic rate band for income tax purposes. Depending on your income, this can reduce the amount of tax you pay at higher rates.
For anyone with an income of up to £150,000 the annual allowance for 2018/19 is £40,000 (from all sources). This means you can contribute 100% of your relevant earnings up to the £40,000 limit, should cash ﬂow allow. For incomes over £150,000 the allowance is reduced on a sliding scale until the lower limit of £10,000. Certain conditions may also permit you to carry forward unused allowances from previous tax years.
If you run an owner-managed company it is worth noting the company can make contributions on your behalf. This can be done by way of salary sacriﬁce thereby reducing income tax, National Insurance Contributions and corporation tax liabilities.
It is worth remembering that even if you have no income you can still contribute £3,600 Gross into a pension. This is a useful tool for parents or grandparents wishing to pass down wealth to their children or grandchildren.
Even though the basic rate of income tax in Scotland is now 19%, the government will continue to provide 20% relief to the pension provider even if the taxpayer only pays the 19% tax. There will be no future claim from the government for the diﬀerence and Scottish taxpayers can keep the extra percentage. Those paying the higher rate of 21% tax can make a claim to receive the diﬀerence between the 20% and the higher tax paid. This will either be via a refund or a reduction in their calculated tax bill resulting in an extra 1% again being claimable for Scottish taxpayers.
Make sure you use up your full ISA annual allowance. For 2018/19 you can invest up to £20,000 by way of cash or stocks and shares.
Junior ISAs are available to anyone under 18 with the savings limit for 2018/19 being £4,260. As anyone can contribute, they are a tax eﬃcient option for parents and grandparents to invest in a child’s future.
The Lifetime ISA (LISA) oﬀers a ﬂexible way to save for your ﬁrst home or retirement. You must be aged 18 or over but under 40 to open a LISA and you can pay into it until you are 50. You can save up to a maximum of £4,000 per tax year to which the government adds a 25% top up.
Other Tax Eﬃcient Investments
We can advise on a range of tax eﬃcient investments including Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT). These aim to encourage investment in relatively new companies. HMRC incentivises this type of philanthropy by returning 30% of investments to you by way of income tax credit due to the potential increased risk of loss. These are not suitable for all investors as they do contain some risk. We would be happy to advise on these and other tax eﬃcient investments.
Capital Gains Tax (CGT)
The CGT allowance for 2018/19 is £11,700 per person and you should plan any disposals to make use of this and consider the alternative option of a tax eﬃcient investment, such as an ISA. If you have used your allowance you could transfer assets to a spouse or defer disposals until after 5 April 2019.
Inheritance Tax Opportunities
We regularly provide succession planning and inheritance tax reports to help our clients identify opportunities for passing wealth down the generations.
Examples of such opportunities include:
- a £3,000 exempt gift allowance per year – if you have not already used your 2017/18 allowance you could pass £6,000 down one or two generations
- each tax year you can gift up to £1,000 per person (£5,000 for a child or £2,500 for a grandchild or great grandchild) as a wedding or civil ceremony present
- provided you can maintain your living standard, you can make regular gifts from income, or gifts of any amount to charities and political parties
- making as many gifts of up to £250 per person as you want during the year, as long as you haven’t used another exemption on the same person.
Capital Allowances – Annual Investment Allowances
The annual investment allowance for a business is £200,000 per year up to 31 December 2018, £1,000,000 from 1 January 2019 to 31 December 2020 and back to £200,000 from 1 January 2021. Owing to the complex rules in relation to this the timing of acquisitions becomes very signiﬁcant.
There are also a number of energy eﬃcient investments that attract 100% ﬁrst year allowances over and above the annual investment allowances. Before making any investment, we would ask you to check with us regarding what qualiﬁes for these enhanced capital allowances.
We always try to be proactive with our clients in identifying tax eﬃcient opportunities. However, we appreciate that everyone does have their own unique situation, therefore please do not hesitate to get in touch with one of our partners or independent ﬁnancial advisers if you would like to know more.
The reader should understand that if you invest in stocks and shares your investment can go down as well as up. This article does not constitute ﬁnancial advice and therefore, before acting upon it, the reader should take the appropriate ﬁnancial advice.
Richard Ayre: February 2019