Things to Do Before the End of the Tax Year
The end of the tax year is nigh! So it’s time to check you’ve done everything you should do before it gets here!
Pension contributions can be used to manage your tax liabilities, but there are annual and lifetime restrictions on the amount you can invest.
If you are thinking of putting more money into your pension fund, speak to your pensions adviser and see whether you are better doing so before or after 5 April. Ask about the interesting things you can do with a self-managed pension. We can put you in touch with an independent financial advisor – drop us a line if you want to know more.
Make sure you maximise your ISA contributions as your allowance for each year is lost if you don’t use it. The limit for the 2016/17 tax year is £15,240. Unlike a few years ago, can be entirely made up of cash if you wish. If you don’t already have an ISA, contact your financial adviser. Contact us if you want details of an independent financial adviser.
ISA’s for your children have a maximum of £4,080 this year. Your child can even make pension contributions, so lots of scope to play with. Pun intended.
Salaries and Dividends
Make sure you pay the optimal amount of salary, bonus and dividend to owner/directors. 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.
Everyone can earn £11,000 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 contribution. If this is less than or equal to their personal allowance, they will not have to pay any tax, but it is a deductible expense for your business. This advice may not apply if they have other sources of income. Check with your accountant if you are in any doubt.
Dividends are paid to shareholders from after-tax profits. The first £5,000 of dividends is tax-free for everyone. For the first time this year, any additional dividends are taxable: 7.5% while you’re in the standard rate tax band and 32.5% above that with a further increase if your earnings are above £150k.
That means a tax bill of £2,000 if you use your standard rate tax ban in full (an increase since last year of… £2,000). However, it still makes sense to pay yourself in this way, if only because the alternatives are even worse. Ask your accountant for advice.
Why not give away some shares?
The new rules mean that maybe it’s time to look at your share structure. We have just released an information pack on this very subject so ask us for details if you want to know more.
There may not be much you can do before the end of the tax year but any landlord of residential property needs to think about how they will be affected by the on-going tax changes. The wear and tear allowance disappeared in April 2016 – although you can claim for the actual cost of replacement items – while the first phase of the interest claim restrictions also takes effect in the new tax year (from April 2017).
Ask your accountant to illustrate how your tax bill will change as the changes are implemented over the next 3 years. You could be in for a shock.
Options to consider include – operating your property empire through a company and using a Deed of Trust to change the beneficial ownership (so that more of the rental income is allocated to the partner with lower earnings).
Capital Gains Tax / CGT Losses
Everyone can make capital gains of £11,100 this year tax-free, which is £22,200 for a couple. You should also think about the consequences of selling assets or investments at a loss.
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. It may suit your situation to sell the asset (or part of it) before 5 April 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 your accountant 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 £11,100 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) can create a capital gain or loss, so if you are feeling generous you might also want to keep an eye on the annual limits.
Inheritance Tax provisions allow gifts of £3,000 per year in total to be made that are exempt from tax. Individual gifts of up to £250 per recipient per year can also be disregarded.
If you are contemplating making a gift of a larger amount to someone, be aware that it could be included in your estate if you die within 7 years of making the gift. If your will does not commit to paying any taxes out of your estate, the recipient could find themselves saddled with an unexpected tax bill.
You can also do what you like with your income (as opposed to capital). For example, 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 whoever you like without anyone having to worry about the tax consequences.
As with all tax issues, always consult an accountant or tax expert for specific advice about your situation.