953 Words on Year-End Planning – Income Tax:

We are approaching tax year end and here are a few tips for you to make sure that you are tax efficient.

  • Use personal allowance £11,500 – Use it or lose it! (Small companies can use salary/bonus to use the allowance. To avoid trigger an NIC charge primary earnings threshold for NIC is £8,164 (2017/18) however payment of salary between £5,876 to £8,164 will therefore avoid an NIC charge while also creating an entitlement to retirement benefits (as earnings in this band will count toward the employee’s contribution record).
  • For small shareholder run businesses paying dividend to the spouse can be tax efficient. Remember that the combined effect of the personal allowance, dividend allowance and basic rate band means that a spouse with no other income can receive £45,000 of dividend income in 2017/18 at an income tax cost of just £2,137 (an effective rate of just 4.75%).
  • At the other end, remember that the personal allowance is restricted where total income exceeds £100,000 so deferring income until after 5 April may be in order where the threshold would otherwise be breached.
  • Diverting income to the spouse to keep the income below £100,000 should also be considered. This can be achieved by setting up bank account into your spouse’s name and transferring assets to the spouse can also reduce the tax bill.
  • Finance cost restrictions for property businesses can also be addressed by transferring the property to the lower earning spouse and it is relatively less complicated process.
  • Where one spouse has been unable to fully utilise his/her personal allowance, an election can be made to transfer some of the unused personal allowance (PA) to their spouse. Only 10% of the PA can be transferred with relief given to the donee as a 20% tax reducer. The tax saving for 2017/18 is therefore £230. While this is a moderate amount, the claim to transfer the unused PA has a 4 year time limit and can therefore be backdated to 2015/16 (being the first tax year for which the relief applied). The claim will continue until it is withdrawn. The claim can only be made where neither spouse pays income tax at the higher rate.
  • Where child benefit is being claimed, care should be taken if possible to keep each parent’s income below £50,000 to avoid the High Income Child Benefit Charge. This claws back child benefit at 1% of the benefit claimed for every £100 of income over £50,000. For a family with 3 children, this equates to a marginal tax rate of 65% on income between £50,000 and £60,000. Remember that 2 parents each with income of £50,000 will be able to claim full child benefit, whereas a family in which one spouse has £60,000 of income and the other spouse has none will be subject to a full clawback. This isn’t necessarily fair but it is reality.
  • Make pension contributions: If income already exceeds £100,000, consideration could be given to making personal pension contributions by 5 April. The gross amount of such contributions are treated as reducing income when determining the PA abatement and this produces an effective rate of relief of 60% on pension contributions where income is between £100,000 and £123,000. Pension contributions can no longer be carried back to the previous tax year so the payment must be made on or before 5 April to reduce income for that tax year.
  • Note that making charitable donations under Gift Aid also has the effect of reducing income when determining the PA abatement (and the child benefit clawback). In this case it is sensible for any such donations to be made by the spouse with income chargeable at the higher rates.
  • Use your dividend allowance: This is £5,000 for 2017/18 but is reducing to £2,000 from 6 April 2018, so take advantage of the higher allowance while you still have time.
  • Dividend to child above 18 years old – tax free £5,000 dividend to pay for their university fee etc.
  • Personal saving allowance – basic rate tax payer can have £1,000 and higher rate tax payer can have £500 tax free allowance.
  • Interest on director current account – You may be able to withdraw up to £6,000 per annum (including the personal saving allowance) without any tax implication but must pay and file CT61 before 5th April.
  • ISA – £20,000 allowance per person should be used.
  • Lifetime ISA from April 2017 – 25% tax free bonus paid by Govt (up to 1,000 pa) open to 18 to 40 years and it can be retirement or first home.
  • Utilise shares in trading company to pay £4,000 dividend to child so can invest in Life time ISA if you want to help them to buy a house.
  • Enterprise investment schemes (EIS) – 30% income tax reducer if you invest in EIS shares. Although these are risky investments but a lot of tax advantages. There is no capital gains tax of shares are sold after 3 years and capital gain deferral is also available if sold early. In case of loss in EIS, it can be offset against income. EIS is eligible for 100% business property relief as well.
  • SEED Enterprise Investment Scheme (SEIS) – 50% tax reducer up to £100,000. These are small ‘early stage’ companies and considered more risk to EIS but more tax advantages compared to EIS. In case of gain on SEIS, gains used to make investment (50% exempt up to £50,000), SEIS losses set against income.
  • Venture Capital Trust (VCT’s) – 30% income tax relief up to 200,000. Dividend income and gain are tax free. Price usually squeezed on sale because there is no active market for them. This cannot carry back VCT subscription like EIS or SEIS.