Many people reading this article will have had to write substantial cheques to HMRC on 31 January. Here are ten tips that could help to make next year’s cheque slightly less painful…
1.Check your tax code each year. Your tax code is used by your employer or pension provider to work out how much income tax to deduct from your pay. If your code is wrong, you may be paying too much (or too little) tax. Your tax code can be found on your payslip and a breakdown of how it has been calculated will have been sent to you by HMRC.
2.If you are married, make the most of each personal allowance and basic rate band. The personal allowance is £10,600 and the basic rate tax limit is £31,785 in 2015/16. It may be possible to transfer income-generating assets (e.g. rental properties) to a spouse to take advantage of their lower tax brackets.
3.Take advantage of the CGT annual exemption. Capital gains under the annual exemption (£11,100 in 2015/16) are tax-free. Where you have already used up your annual exemption, you may wish to consider deferring any further disposals until the following tax year if practically possible. If you are married, owning assets jointly also ensures that each spouse’s annual exemption is used (assets can be transferred tax free between spouses).
4.Claim tax deductible expenses. If you are self-employed, you can claim a tax deduction for expenses which are incurred “wholly and exclusively” for the purposes of your business. This includes office running costs and the salaries of any employees, including your spouse.
5.Use the annual investment allowance. If you are self-employed, the annual investment allowance provides a 100% tax deduction on, currently, the first £200,000 spent on eligible plant and machinery.
6.Consider incorporation. The corporation tax rate, currently 20%, is significantly lower than income tax rates, which are currently up to 45%. You will of course need to pay income tax when you take money out of the company, in the form of salary and/ or dividends. However, to the extent that you do not require the income, you will have the opportunity to accumulate profits within the lower corporate tax environment.
7.Take dividends before 6 April 2016. There will be significant changes to the taxation of dividends from 6 April 2016, as a result of which many owner managers will pay more tax on the dividends they take from their companies. To the extent that your company has sufficient distributable reserves, you may therefore wish to consider declaring larger dividends before the changes take effect. The cash can be loaned back to the company, if required, for cash flow purposes.
8.Contribute to a pension scheme. If you contribute to a workplace pension scheme, any pension contributions you make will be deducted from your salary before income tax is calculated. If you contribute to a personal pension scheme, your pension provider will claim tax relief at 20% on your behalf and add it to your pension pot. If you are a higher or additional rate taxpayer, you can currently claim tax relief on the extra 20% or 25% in your self-assessment tax return. However there has been speculation that this additional tax relief may be withdrawn from 6 April 2016 as part of ongoing pension reforms, which will also see the government cut the annual allowance for those earning more than £150,000. You may therefore wish to consider making larger pension contributions before the changes take effect.
9.Use your tax-free ISA allowance. You can currently save up to £15,240 a year tax-free in an Individual Savings Account (“ISA”). This can be saved as cash, shares, or a combination of the two.
10.Claim tax relief on Gift Aid donations. When you make a Gift Aid declaration, the charity can claim tax relief at 20% on the amount you donate (effectively increasing the value of the donation in their hands). If you are a higher or additional rate taxpayer, you can claim tax relief on the extra 20% or 25% in your self-assessment tax return.
Please get in touch with your usual Ryecroft Glenton contact on 0191 281 1292 if you would like to discuss any of the above in further detail.