By Ryan Meredith
At de Jong & Phillips we understand that it is difficult to run your business and it is often this time of year that business owners ask the following:
- What about me?
- Have I made sure that my personal tax position is looked after?
- Are there any available reliefs I might miss out on?
This blog should ensure that you make the optimal decisions to benefit you, which is why you set up in business after all, isn't it? Don't miss out by not taking action before the 5th April 2020.
The key areas that you should be considering can be broken down into five sections
1. Income tax
The most common and widely known income tax allowance to consider is your personal allowance. The personal allowance for the 2019/20 is £12,500 and where possible, you should take all steps necessary to ensure this is fully utilised for you and your family.
Following the personal allowance, the next source of tax free income to consider is the dividend nil rate band. If you are in control of distributions, on any shares that you own, now is the time to ensure that you have declared at least £2,000 in dividend income.
Ensuring that you utilise the basic rate band will ensure that you pay the lowest rates of tax whilst maximising your income. In the worst case you will pay 20% income tax in the basic rate band but, in the best case dividend income will ensure that you pay the lowest income tax rate of 7.5%.
If your lifestyle and personal situation takes you into the higher rate band, tax rates of 32.5% and 40% for dividends and salary are not to be feared but may be best managed if kept below the 100k mark, a point in which the marginal rate of tax can reach an eye watering 62%.
The personal savings allowance (PSA) introduced a few years back allows savers to earn tax free interest of £1,000 for basic rate taxpayers and £500 for those that fall in the higher rate band. Ensuring you are earning interest on your excess cash is no longer taxing.
If you are married or in a civil partnership, you may qualify for the married couples allowance. If one of you is earning below £12,500 annually with the other spouse/partner earning between £12,501 and £50.000 you may be eligible. The maximum personal allowance available for transfer is £1,250 which would give rise to a potential tax saving of £250.
2. Income tax relief
Personal pension contributions are an effective way of reducing your tax bill whilst maximising your retirement income. The maximum you can invest in a personal pension is the lower of relevant annual earnings and £40,000. If there are unused allowances from the previous 3 years, these may be available.
This relief can assist by extending your basic rate band, meaning more income is assessed at the basic rate of tax. It can also work by adjusting your annual net income to fall below £100k ensuring you don't run the risk of losing your personal allowance.
It may be more effective to make pension contributions straight from your company. Advice should be sought to ensure you are making the optimal decision based on your allowance capacity and personal circumstances.
Gift aid is often overlooked when considering the year-end. Many of us tick the gift aid box on charity donations to ensure that the maximum benefit can be claimed from our acts of kindness. What happens next? If we don't keep a log we forget to claim the gift aid relief via our self-assessment tax return, resulting in handing over more tax than you need to.
GIft aid relief works in the same way as personal pension contributions by extending your basic rate band and relieving tax at 20% or 25% (if income is derived by dividends).
Much like pension contributions, a key opportunity for those with control over their income. However, these tax reliefs are only available to those paying rate in the higher and additional rate bands.
3. Capital Gains Tax
The annual exemption for capital gains tax in the 2019/20 is £12,000 and if you are thinking about making capital disposals, making them before the 5th April will ensure you do not use your annual exemption.
This is particularly effective if you have a share portfolio where you are looking to liquidate share holdings by structuring disposals over a number of years.
Care needs to be taken so that you don't fall foul of bed and breakfasting anti-avoidance provisions.
We are aware of the effect of the Coronavirus on stocks and shares, this may not be appropriate for you, however this should be a key consideration for the future.
The annual ISA savings allowance currently stands at £20,000. Income earned on ISA accounts is tax-free and not in scope for personal tax. If you have not utilised your annual allowance for 2019/20 and have taxable deposit interest, you may consider transferring funds to your ISA investments to reduce your tax bill.
Tax advantaged investments such as SEIS and EIS investments are becoming more commonplace. The tax breaks on these investments are generous and can relieve income tax liabilities of 50% and 30% respectively. This means that up to 50% of your investment may be wiped off of your income tax liability in the year of subscription or the prior year if you elect to do so.
Please note that we are not qualified to give investment advice so if you are intending on making investments to maximise your tax allowance, we advise you to first get in touch with your Independent Financial Advisor.
5. Inheritance Tax
If you are of retirement age and in the fortunate position that you have available resources to help your family, here is an often overlooked but effective inheritance tax mitigation strategy.
Every year you are entitled to a £3,000 annual exemption for gifts made. £6,000 if you have not used the exemption from the previous year. Gifts in excess of this amount would become a potentially exempt transfer and would attract inheritance tax rates of up to 40% if you die within 7 years.
Using this exemption annually can ensure a saving on inheritance tax and ensure that your wealth is transferred to your nearest and dearest, tax-free.