End of Year Tax Saving Tips
With the end of the tax year fast approaching, this is the perfect time to review your tax situation and to make sure you are making the most of the opportunities available to save on your tax bills.
Here are a few things to think about regarding your income and your investments.
If you have not been paying family members who work for your business, you need to sort out the situation by the end of the tax year. Similarly, it could make sense to pay a dividend before 5 April. Tax changes make the situation even more critical this year. More here…
Your personal tax year ends on 5 April 2016. Make sure you pay yourself the optimal salary by that date. A salary must actually be paid, even if you give the money back to your company as a loan. There are a number of thresholds to be aware of – you can find the key personal tax thresholds HERE.
Key point: the effective tax rate on income between £100,000 and £121,200 is 60%. Then it’s down to 40% again. But everything over £150,000 is taxed at 45%.
Everyone can earn £10,600 in the current tax year without having to pay any tax and £155 per week (£8,060 per year) without having to make national insurance contributions. If you have been dragooning your lovely family to help out in your business, you should pay them a fair rate for their work. If this is less than or equal to their personal allowance, they will not have to pay any tax, while it is a deductible expense for your business. This advice may not apply if they have other sources of income so check with us if you are in any doubt.
If you pay salaries, it makes sense to register as an employer – in fact, it may be compulsory, check with us. It can also save you tax and your employees can get NI entitlements (e.g. pensions). Do this before 5 April 2016 to get the benefit in the current tax year.
Changes from 6 April: There are changes in tax bands coming, but nothing dramatic. The big change is for dividends, which are being taxed more harshly.
Dividends are paid to shareholders from after-tax profits. The net dividend is effectively tax-free for standard rate taxpayers in 2015/16. If your company is profitable, consider declaring a dividend to use up as much as possible of the shareholders’ standard rate tax bands – but remember to add on the tax credit (1/9th) when you are working out the amount.
Dividends must be declared and become payable by 5 April 2016 if they are to count as this year’s income, but the cash does not have to leave the company’s bank account. Please check with us to make sure you are doing it correctly.
With dividend taxes increasing from 2016/17, it might be wise to look ahead. If you are planning to take a large dividend next year (for a deposit on a house, for example), it might make sense to increase your income this year, even if that means paying more tax now, if that results in an overall tax saving when you look at the two years together.
We will be exploring this in further detail over the next few days, in our Tax Attack series of blog entries.
Changes from 6 April: everyone can earn £5,000 of dividends tax-free. On anything above that, expect to pay an additional 7.5% tax compared to the current tax yeaar.
Capital Gains Tax / CGT Losses
Everyone can make capital gains of £11,000 this year tax-free. You should also think about the consequences of selling assets or investments at a loss. More here…
If you are sitting on capital gains and are thinking of selling your assets, then it’s worth considering the tax impact of the timing of the sale. You can make gains of £11,000 in the current tax year without having to pay any tax. It may be sensible to sell the asset (or part of it) before 5 April 2016 to use up your allowance.
Assets can be transferred freely between spouses, so a couple could claim double the allowance with a little careful planning. Naturally there are some anti-avoidance rules so check with us first.
With so much volatility in asset prices, many people may be holding potential capital losses. Losses can be offset against gains, so it might be worth your while to sell some assets at a loss if it brings your overall capital gains for the year below the £11,000 annual allowance.
If you have no capital gains, then you should still include any capital losses on your tax return as these can be carried forward and offset against future capital gains.
You may not be aware that even giving away an asset (other than between spouses) normally creates a capital gain or loss, so if you are feeling generous you might also want to keep an eye on the annual limits.
Changes from 6 April: CGT is currently charged at 18% of the gain for standard rate taxpayers and 28% for higher rate taxpayers, or 10% with entrepreneurs’ relief. No changes have been announced. However, watch out for the budget, CGT is regularly rumored to be one area where there is scope for increasing rates. Entrepreneur’s Relief is also said to be in the Chancellor’s sights.
Inheritance Tax provisions allow gifts of £3,000 per year to be made that are exempt from tax. If you are contemplating making a gift of a larger amount to someone, read this…
Each person can make gifts totaling up to £3,000 per year that are exempt from inheritance tax. Any excess over this amount may be included in the estate of the person making the gift if that person dies within 7 years of making the gift.
If you are looking for ways of reducing the inheritance tax that will be payable on your estate, you should think about making gifts of £3,000 per year to your loved ones (each individual can do this so a couple can give away £6,000 – that makes for a tax saving at current rates of £2,400).
Gifts of up to £250 per recipient per year may also be made without having to worry about inheritance tax.
You can also do what you like with your income (as opposed to your capital). So if you have income of £50,000 per year after tax and only need £30,000 to live on, you can give the rest to whomever you like without anyone having to worry about the tax consequences.
As with all tax issues, always consult us for specific advice about your situation.
If you are putting money into a pension scheme or ISA, your annual limits expire on 5 April 2016. But that’s not all…
The maximum you can invest in a pension this tax year of £40,000.
There are further restrictions so contact us first.
If you don’t have a pension set up, don’t leave it to the last minute – it takes time and advisers are very busy as we approach the deadline.
Changes from 6 April: the Chancellor was targeting (yet another) overhaul of pension contributions and the associated tax relief but it has just emerged (5 March 2016) that these plans have been scrapped. However, it seems likely that the pension regime will become less generous over the next few years so don’t hang around.
Everyone can invest up to £15,240 in an ISA in the current tax year.
The limit for junior ISAs is £4,080.
Use it or lose it – you can’t carry forward any unused allowance.
Contact us if you need more advice.
Changes from 6 April: None. ISA limits will not changed.