With yet another tax year drawing to a close, now is a good time to pause and take stock of whether you have made full use of the reliefs and exemptions available, all of which help towards legitimately reducing tax bills as far as possible.
We have put together some ideas below and we would be pleased to discuss any of these in more detail with you if required.
Tax rates and personal allowances – An individual has a personal allowance of £9,440 in 2013/14, which means any income up to this amount is tax free. Any taxable income over £9,440 is then taxed at between 10% and 45%, depending on the income source.
However, once your taxable income exceeds £100,000, the tax free personal allowance is reduced by £1 for every £2 over £100,001, which means that income of between £100,001 and £118,880 is effectively taxed at 60%, with income over £150,000 being taxed at 45%.
Making pension contributions and gift aid donations may reduce your taxable income and so well timed payments to your pension scheme or to a charity could save you tax of up to 60%.
Make sure you are making the best use of ISA/National Savings/VCT/insurance bond investments to give non taxable income sources, or a return of capital taxable at 28%.
Alternatively, consider transferring income producing assets to your spouse if they have a lower income than you, thereby removing income from your higher tax rates. Income earned from jointly owned assets is automatically taxed equally, even where the asset (other than shares in a family company) is not owned equally and so you only need to give away a 1% interest to your spouse for them to be taxed on 50% of the income.
Also consider deferring income into a later year if possible or see below for anyone in business.
Aged 65 or over – An individual who is at least 65 is entitled to a higher personal allowance of £10,500 (£1,060 enhanced element), although this is gradually withdrawn when income goes above £26,100 therefore, as set out above, make sure you review/share income levels as far as possible to avoid losing any part of the enhanced element.
Child Benefit High Income Charge – A similar problem exists for individuals where they or a partner receive child benefit income, as a claw back of the child benefit is made where either person has taxable income of more than £50,000. Income may be reduced in the same way as above to help reduce any claw back.
Salary sacrifice – If you are an employee, it may be possible to persuade your employer to change your salary package, swapping salary for tax free benefits such as pension contributions, child care vouchers or professional subscriptions, or for taxable benefits such as medical insurance cover or gym membership.
Sacrificing salary, with your employer making a pension contribution on your behalf, can also be a helpful way to reduce your taxable income for the purposes of retaining your full personal allowance.
Not only will a salary sacrifice save you income tax and national insurance, it will also save your employer national insurance as well, who may even be willing to pass all/part of those savings on to you.
Fixed rate deductions – Employees are allowed to claim tax relief on expenses incurred “wholly, exclusively and necessarily” in the performance of their duties. This will include having to buy any protective clothing and small tools. Whilst you can claim for actual costs incurred, many industries also have a pre agreed fixed rate which can help save you tax.
Mileage claims – If your employer does not reimburse your business motoring costs, you can claim a deduction of 45p per mile (for the first 10,000 business miles in a year, and 25p thereafter), which will help reduce your taxable income. Please remember though that driving to your normal workplace is not considered to be business travel and a full mileage log to support your claim is recommended.
A similar claim is also possible for traveling with passengers or by bike or motorcycle.
Reimbursement by your employer of up to the above amounts will give you tax free income.
Low emission or electric cars – The cost of being provided with a car by your employer has increased significantly over recent years and will continue to do so by at least 1% each year, with free fuel now only being provided in exceptional cases. Consider changing your company car to one with a lower emissions factor or even replace it with an electric car, which is a tax free benefit until April 2015.
Pension contributions – Provided you have enough “relevant earnings” in the year (broadly employed/self employed income rather than investment or dividend income), it may be tax efficient to make or increase pension contributions before 5 April 2014, especially where you have unused relief to carry forward from the previous three years.
Pension contributions save tax at the higher and additional rates although tax relief is generally only available for pension contributions of up to £50,000 a year, including any contributions made by your employer or other third party (see below). This limit will reduce from 6 April 2014 to only £40,000, although you will still be able to use any unused relief from the last three years.
Please note it is essential that you know your pension input period in order to plan for this, as this may not be the same as the tax year and you could end up with an unexpected tax charge if you do not take appropriate advice.
If you are a member of a defined benefit or final salary scheme, your £50,000 limit is tested against the value of your benefits under the scheme rather than the contributions made.
Family pension contributions – not only can you or your employer pay contributions to your pension fund, but other family members can as well, such as your parents or grandparents.
Provided you have enough relevant earnings (wages/self employed income), family pension contributions are a useful way to help keep income below £50,000 and retain full child benefit entitlement where you do not have the funds spare to pay into your own pension pot.
These contributions also have the added benefit of saving your family member inheritance tax, either by being a gift out of normal income, or by being within the annual exempt amount.
Say you have taxable income of £60,000 and received child benefit for 4 children totalling £2,449. If your parents paid £8,000 into your pension fund (grossed up in your fund to £10,000), your adjusted income falls to £50,000, meaning no claw back of your child benefit, saving you total tax of £4,449. Your parents will save £3,200 in inheritance tax, so a cash outlay of £8,000 will save you and your family tax of £7,649, which means the contribution is almost free!
Refinance rental properties – If you own a property which is let out and has substantial equity in it, consider refinancing it to use the funds to repay private borrowings. That way, you will effectively get tax relief on private debt by reducing your tax bill on your rental property. Alternatively, use the funds to invest in assets which either provide a tax free or capital return.
Furnished holiday lets – This type of property let benefits from a number of tax breaks provided a number of tests are met. Consider how you can maximise letting periods before the year end in order to benefit from the tax breaks by marketing your property or offering special deals, making sure you keep a full record of actual letting and available letting days.
ISAs – You can invest in an ISA every year and whilst the amount invested does not attract tax relief, any income it gains on the investment is free from income tax.
The limits for an individual for ISA investments in 2013/14 are £11,520 in total (with up to £5,760 in a cash ISA).
Negligible value claims – With many companies struggling, it may be worth considering making a negligible value claim on your investment to reduce taxable income. Losses on unquoted shares that you subscribed for when they were first issued can be claimed in the year of loss (or negligible value) and set against your other income in the year to reduce your tax bill.
Alternatively, the claim may be carried back one year. This type of loss use is restricted (see Loss restrictions under Owner Managed Businesses) unless they are EIS/SEIS shares but can still help to dramatically reduce tax burdens.
OWNER MANAGED BUSINESSES
Structure – Deciding how your business is to be structured is never an easy decision and choices range from sole trader, partnership, limited liability partnership (“LLP”), limited company or a combination of these.
New rules coming in from April 2014 will mean that some partnership and LLP structures are no longer efficient, such as those involving companies or LLP members who will be treated as employees under the new rules.
Therefore any business involving a partnership or LLP should carefully review its structure now to avoid the impact of the new rules as far as possible, although it is important to note that the new rules include certain anti avoidance measures.
Company tax rates – The main rate of corporation tax will fall again from April 2014 from 23% to only 21%, with marginal rates falling to only 21.25%. This means that the impact of ring fencing different ventures in a number of different companies continues to reduce and so now might be a good time to consider a restructuring programme.
Further, as company tax rates are lower than income tax rates, trading through limited companies and taking profits out as dividends will save tax and national insurance costs.
Spouses/Partners – Consider employing your lower earning spouse as a way to pass income across to them to save you tax as a couple. Do make sure though that payments are physically made and are commensurate for work carried out by them, otherwise the arrangements may be challenged by HMRC.
You could also consider making your spouse either a partner or shareholder in the business, although if they are a shareholder, make sure they own at least 5% of the voting rights in the company and are either an officer or director to protect valuable entrepreneur’s relief on any eventual exit from the business.
Dividends – Consider timing dividend payments so higher income is received in one year, and lower income is received in the following year. This measure could help protect against the loss of either your personal allowance or any child benefit in alternate years.
Loans from close companies – Paying a dividend is an effective way to clear any overdrawn loans in your company. New rules which came in from 20 March 2013 make it more difficult for a company to make loans to its owners without having to pay a parking charge of 25% with HMRC. Make certain you use your and your spouse’s basic rate tax bands in full to pay dividends at no tax cost to you to help avoid this parking charge.
Employer pension contributions – Review the scope for making employer pension contributions into directors’ or staff’s personal pension schemes, ensuring contributions are actually paid before the end of the accounting period to obtain relief against corporation tax.
Salary sacrifice – Sacrifice salary in exchange for employer pension contributions or delay the payment of a bonus until the new tax year, with any salary sacrifice arrangements being properly put in place. This may help keep income below the £100,000 or £50,000 threshold in this current year (see tax rates, personal allowances and high income child benefit charge above).
Repairs and capital – For unincorporated businesses, accelerate expenditure to help reduce profits to retain personal allowances and child benefit. Businesses may currently spend up to £250,000 on capital equipment in an accounting year and receive tax relief in full in the year of spend. This limit (the Annual Investment Allowance) is reducing to only £25,000 from 1 January 2015 and complex rules apply for periods straddling this date, so please do take advice before committing your business to a high capital investment.
Recent case law now also means that it is easier than ever to obtain a deduction for repairs rather than having to capitalise costs, which will help when the investment allowance falls at the end of this year.
Capital allowances on fixtures – New rules for tax relief on fixtures in commercial properties come in from April 2014 making it vital to ensure you are claiming tax relief where appropriate on any fixtures installed in commercial properties. This is a specialist area but will help reduce current year tax bills as well as helping you to retain maximum value in your property on any eventual disposal.
Loss restrictions – Careful planning is required on the use of losses now due to restrictions on relief being introduced in April 2013. Relief on trading and certain other losses is now restricted to the higher of 25% of net income and £50,000 per annum. Please do take advice if you anticipate making any losses to ensure your relief is maximised.
CAPITAL GAINS TAX
Gifting to Your Spouse – As with income tax, each person has an annual exempt amount which is lost if not used. For 2013/14, the exemption is £10,900. Gift an interest in assets to your spouse prior to a third party disposal in order to utilise their exempt bands.
If one spouse has unused losses, these can only be used against gains incurred by the same spouse and a transfer of assets may therefore be appropriate before any third party disposal to reduce the overall tax liability for the couple.
While gifting assets to a spouse immediately before a disposal is acceptable, there are limits on transferring assets in such a way where the end result is circular. It is therefore important that you seek specific advice if you intend to do this.
Capital losses – Capital losses are offset against chargeable gains before calculating any reliefs, such as entrepreneur’s relief, therefore try and delay crystallising losses until the following tax year, where appropriate. Crystallising losses can also mean wasting part of your annual exemption unless managed carefully.
Alternatively, if you have any capital losses to use either in the current or from earlier years, consider crystallising gains to use the losses thereby avoiding any tax charges. “Bed and breakfasting” can be a useful tool to sell shares standing at a gain and either buying the shares back after more than 30 days or by your spouse/trust buying the shares back instead.
More than one home – If you have a holiday home or have acquired a second home during the year, an election regarding your main residence might be favourable. Elections are an appropriate way to actually occupy two homes concurrently and are time limited. An election can make a significant difference to the amount of tax you pay on the sale of your holiday home.
If you still own your old residence, having moved to a new property, it is worth noting that the rules for main residence relief will change in April 2014. Currently, even if you no longer live in your former home, any gain attached to the last 36 months will automatically be exempt. From April 2014, this will fall to only 18 months and so there may be an advantage in selling before April 2014, if practicable. The reduced exemption will also affect lettings relief.
Business Premises – If your business premises are owned personally and are used by your company or partnership, you may need to review any rent charge made during the tax year as this can impact on the available entrepreneur’s relief due on the disposal of any premises.
EIS and Seed EIS – Income tax liabilities may be reduced by making an investment under the Enterprise Investment Scheme (EIS).
The EIS scheme provides 30% tax relief on investments of up to £1 million in a tax year. Investments can be carried back by up to one year provided the limit in the previous year was not reached. The limit last year (2012/13) was also £1 million.
EIS shares are exempt from capital gains tax once they have been held for three years. All tax relief is dependent on the qualifying conditions being met for three years.
Capital gains tax on the disposal of other assets can be deferred by reinvesting the proceeds in EIS shares, without limit. The tax on the original gain will become payable when the EIS investment is sold although further reinvestment can take place. The reinvestment can take place up to three years after (or one year before) the original disposal.
Seed EIS is intended for start up companies and their investors. Income tax relief at 50% is available on up to £100,000 invested in a year and works in a similar way to EIS.
Wills – Ensure your Will is up to date and works to minimise tax whilst giving your family flexibility and protection for the future, for example by using trusts. Also make sure that your Will considers Business/Agricultural Property Relief (“BPR/APR”) to reduce tax burdens.
Consider converting non qualifying assets to qualifying assets for example by investing in AIM shares rather than quoted, or converting company loan accounts to a rights share issue.
Annual Exemption – Take advantage of the IHT annual exemption which permits gifts of up to £3,000 per annum to be made tax free. Any unused amount can be carried forward one year only. Small gifts of £250 per done may also be made as well as gifts in connection with marriage.
Gifts out of Normal Income – You can also make gifts to your family as “normal expenditure out of income” with these gifts being covered by your income, leaving you enough income to cover your normal living expenses.
This can be a useful way for grandparents to pay school fees for their grandchildren provided there is sufficient income to support this level of generosity.
Many of the above tax reliefs and exemptions are on a ‘use it or lose it’ basis requiring you to take action before 5 April 2014. All will rely on the circumstances of each individual therefore, if any of the above points interest you, please do get in touch.