When it comes to taxes there’s one certainty – you’ll pay more tax than you need to unless you plan. The Tax Guys’ Jonathan Amponsah CTA FCCA, reveals the steps you need to take to review your taxes.
With end of the tax year looming it is important to take steps to ensure that you don’t miss out on opportunities to reduce your tax bill.
Here are suggestions for business owners with a March year end, and higher rate tax payers:
Claim these often-overlooked expenses
Where you’ve incurred expenses wholly and exclusively for the purpose of your trade or business and you have evidence to back this up, these should be claimed first. Then there are other areas to review that are often overlooked.
Action. Review the following areas to make sure you are not missing out. Claim where appropriate.
Bad debt provision (make sure you have taken steps to recover the money)
Provision for directors’ remuneration to be paid up to nine months in your accounting year
Use of home as office (reasonable amounts only to avoid more tax later)
Stock provisions, especially in cases where items of costs are worth less than they cost
Interest paid, including on loans you have made to the business
Review your income recognition policy
If you normally receive money before carrying out work, the income should be shown in your accounts when you’ve performed the work. This should be matched with the costs and expenses of doing the work. By not reviewing this, you could be paying more tax earlier than you should do. Let’s say you’ve received £4,000 in March for a training programme or website design to be delivered in April, make sure this is not shown as income (hence profits) in your March accounts to avoid overpaying your taxes early.
Action: Show income at the right time
Use and leverage your income tax allowances
The first thing to consider is your level of income and the total tax-free allowances you get. So, if you add up the income tax allowance, savings allowance and dividends allowance, you get about £14,850 tax free income for single person and £29,700 for married couple.
Action: The action to take here is to generate sufficient income to fully utilise the personal allowances.
However for higher rate tax payers, the personal allowance is reduced by £1 for every £2 of income above £100,000. What this means is that for those with income band of £100,000 to £123,700, the effective rate of income tax is 60%.
Action: Reduce your taxable income by making pension contributions or transferring other income producing assets to your spouse. You must take care with this and get expert advice/help.
Use capital allowance or crystallise losses
You are allowed a tax free capital gains allowance of £11,700. However, if you don’t use this allowance you will lose it. If it makes financial sense to sell some of your investments, then doing so just before the tax year and just after the tax year will reduce your tax bill. Why? Because you get to use two allowances and defer the tax on the second sale until January 2021. Depending on your level of gains, you may not pay any tax at all.
For example, let’s imagine you have gains of £23,400 from your investments and you decide to sell all in one go. You’ll pay £2,340 in capital gains tax (£23,400 minus £11,700 taxed at 20%).
However, if you spread the gains over two years and you sell £11,700 in March 2019 and another £11,700 after 6 April 2019, you will have no tax to pay.
Where your investments have not done well or have fallen in value, (as the case may be for many crypto currency or bitcoin investors), selling them before the tax year means that you will crystallise any losses you’ve made. This means they can then be used against any profits from your other investments or carried forward into future years.
Action: Harness the power of planning to make the best use of your full capital gains allowance.
Claim this valuable corporate tax relief
Normally when you incur a legitimate business expense wholly and exclusively for the purpose of your trade, you can claim 100% of these expenses against your business income which reduces your tax bill. Do the tax rules allow you to claim a lot more than 100% in some circumstances? Can you claim say, £230 when you’ve only actually spent £100?
Yes, because the Research and Development (R&D) tax relief allows you to do this.
Many companies miss out of this valuable relief due to lack of awareness and because they erroneously think that R&D is only available to big laboratories and pharmaceutical industries.
Action: If you have a company in the creative, engineering, software or any innovative industry where you’re solving difficult problems for customers and raising the bar in your industry, please speak to your accountant or a specialist tax adviser about R&D tax relief before 31 March.
Claim £4,800 tax savings
We don’t like talking about death, but it needs to be done. People often pay unnecessary inheritance tax by not claiming the right reliefs. Gifts of up to £3,000 per year can be made free of inheritance tax. Unlike most of the tax allowances, the limit increases to £6,000 if the previous year’s annual exemption was not used. This means you can use last year’s allowance of £3,000. So, a married couple can make inheritance tax-exempt gifts including cash totalling £12,000 per tax year.
Action: Put a plan in place for these gifts and save a possible tax bill of £4,800 in the event of your demise.
Review your pensions and contributions
Pensions provide one of the most tax efficient ways to save.
Pension contributions currently receive up to 45% tax relief. For example, a £1,000 investment into a self-invested personal pension (SIPP) benefits from 20% basic rate tax relief (£250) added automatically. Higher-rate taxpayers can claim up to a further £250 in tax relief, while 45% rate taxpayers can claim back up to £312.50.
Contributions in excess of the annual allowance (currently £40,000 for most people) will be subject to a tax charge. Remember you can’t normally take money out of a pension until you’re 55 (57 from 2028).
But if you’re a director of your own company, it is possible for the company to pay into your pension pot (say SIPP or SSAS) for you as part of your remuneration. Then instead of merely leaving the funds in there until you’re say 55, you can leverage the funds and get a second bite of the tax cherry. How? These pension schemes (say a SIPP), subject to certain rules, can be used to buy, say, a commercial property and the rental income gets additional tax benefits.
Action: Review your pension arrangements with a qualified professional before going ahead with any tax or investment decisions
Consider EIS/ SEIS schemes
The Enterprise Investment Scheme (EIS)/Seed Enterprise Investment Scheme (SEIS) offer some generous tax breaks in the form of income tax refunds, free capital gains tax and free inheritance tax for investors.
If you invest in an SEIS registered business, you get to claim 50% of the investment back against any tax income tax you’ve already paid at source. Plus, you don’t pay any capital gains tax if you sell the investment at a profit after three years.
Action: If this kind of investment appeals to you remember there are conditions to meet so please speak with a qualified adviser before proceeding.
Preparing for Making Tax Digital
If you’re a VAT-registered business, then you’re probably aware that from 1 April 2019 you will have to keep your records digitally and provide your VAT return information to HMRC through a Making Tax Digital (MTD) compatible software. If your system is not compatible you may not be able to submit your VAT returns and risk incurring VAT surcharges.
Action: To reduce the impact of MTD on your business and avoid unnecessary costs, start planning now and delegate this task to your accountant, book keeper or relevant in house personal.
If you’re considering making a tax efficient investment then before the tax year ends on 5 April, consider making full use of the stocks and shares ISA allowance.
If you’re over 18 and a UK resident, you can contribute up to £20,000 to a stocks and shares ISA this tax year and there’s no UK income or capital gains tax to pay on your investments. And although it’s designed for the long term, you can take money out if you really need to.
Action: Consider what funds you have available that you can put into an ISA. Then speak with an Independent Financial Adviser about your investment and risk requirements before deciding which ISA to choose.
To manage your taxes effectively you need to plan. Without planning it is highly likely that you’ll end up paying more tax than you or your business needs to. Talk to your accountant and other advisers. You may be surprised at how much you can reduce your tax bill.