No business owner or individual wants to pay more tax than they need to. Over the years, a number of different allowances and reliefs have been introduced by HMRC and the Government to give companies and citizens the opportunity to reduce the amount of tax they're liable to pay.
In this article, Sunny Accountants consider the 7 most financially efficient reliefs to take advantage of as the tax year ends including:
- maximising your pensions contributions,
- using your ISA allowance,
- using your children's ISA allowance,
- reducing potential inheritance tax on your estate,
- claim back on Gift Aid,
- spread your capital gains tax over two tax years, and
- efficient timing of dividend payments.
Maximise your pension contributions
You (and your company) can contribute up to £40,000 a year towards your individual pension pot up to a lifetime value of £1,055,000.
You'll receive tax relief on your entire contribution depending on the income tax bracket you fall into – 20% at the basic rate, 40% at the higher rate, and 45% at the additional rate. In addition to contributions being free of tax, so are the gains that you make on your pension investments.
If you have not made the full £40,000 contribution to your pension in the last three years, you can carry your contributions forward. You have to use the previous year's shortfall first and then work back.
For example, if you invested £10,000 in your pension in the last three years, you could pay an additional £90,000 into your pension pot this year without penalty (subject to not breaching the lifetime limit.
There are complications to using the carry forward contributions method so please get in touch with your Sunny Accountant prior to using it.
Use your ISA allowance
You can save or invest money and any other income earned with an ISA. The annual allowance per person at time of writing is £20,000. Unlike with pensions where you can rollover your unused allowance from previous years, this option is not available for ISAs.
A cash ISA is essentially identical to a personal savings accounts and therefore it has the disappointing results you'd expect in terms of the interest payments you receive. Cash ISAs are very secure however so they are a suitable option for the particularly risk-averse who don't mind inflation eating into the value of their savings.
A stocks and shares ISA allows you to invest in open-ended investment companies, investment trusts, corporate bonds, government gilts, and in quoted companies listed on a stock market recognised by HMRC.
Stocks and shares ISAs protect your savings from dividend tax (companies often pay you dividends when you own their shares) and capital gains tax (levied against a rise in most assets personally held when sold).
Innovative finance ISAs are a risker form of ISA and, unlike with cash ISAs and stocks & shares ISAs, you are not covered by the Financial Services Compensation Scheme.
Build up your children's ISA
Junior Individual Savings Accounts are ISAs specifically designed for under 18 years – they're most often used by parents to build up a nest-egg for their children when they come of age. As with standard ISAs, there are cash junior ISAs and stocks & shares junior ISAs.
Each child may actually have two ISAs at once within any given year – a junior ISA and a full ISA allowing you to save up to £24,368 a year per child.
Your child can not withdraw the money until they're 18 years old but they are permitted to control the account from the age of 16.
Reduce potential inheritance tax
Inheritance tax is charged at up to 40% on the value of your estate on your passing if your estate is worth £325,000 or more. The value of your estate is the difference between what you owned when you die and what you owe.
Inheritance tax is formidably complicated and we strongly suggest you seek advice from your Sunny Accountant as soon as possible on the matter. One major reason for this is that HMRC are now investigating one in five inheritance tax cases – they are targeting inheritance tax in the quest to maximise the amount of revenue they raise from the public.
We have written extensively about inheritance tax on this site and Karl Watts, owner and founder of Sunny Accountants, is one of the region's leading experts in lawful and transparent inheritance tax mitigation.
We invite you to get in touch with Karl to consult about inheritance tax but there are certain legal ways in which you can bring down the value of your estate:
- £3,000 annual exemption (can be rolled forward if not fully utilised) for gifts
- gifts for weddings or civil ceremonies at £1,000 per person or £2,500 per grandchild or £5,000 per child
- normal gifts from your general income which don't affect your standard of living
- payments of money to help with someone else's living costs
- political party or charity donations
- £250 small gifts exemption – an unlimited number of gifts up to the value of £250 as long as the person you're giving a gift to did not receive a gift under the £3,000 annual exemption
Gift Aid is a tax incentive designed to encourage citizens to make donations to registered charities. With it, the charity you're donating to can claim an additional 25p for every £1 you give to them. You don't have to do anything for them to get this – they claim on your donation.
For a donation to qualify, the Gift Aid you've paid must not be any higher than four times the amount of capital gains tax or income tax you've paid in a year.
How does claiming back Gift Aid on the donations you've made work? If you're a higher rate taxpayer and you gift a charity £300, it will be treated as £500 on which you can claim back £100. For additional taxpayers, you can claim back £125.
To make a claim, you'll have to be in receipt of the Married Couple's Allowance or you'll have to keep records if you pay a higher rate of tax, your personal allowance is higher (age-related), or you're claiming tax credit.
Careful with Capital Gains Tax
Capital Gains Tax (CGT) is a tax paid on profits made:
- from the sale of a business,
- on shares not held within a PEP or an ISA,
- on items that you own which have a value greater than £6,000 (other than your car),
- on certain types of primary residential property,
- on property you owned which you rented out to others, and
- on business assets.
If you're a basic rate taxpayer, capital gains tax is charged at 10%. For higher rate and additional rate taxpayers, there is a 20% charge.
There is an annual exempt amount of £12,000 on capital gains – you don't pay any CGT at all if profits from the all the assets you've sold within a tax year are less than that amount. You only pay tax on the profit over that amount.
If you are expecting to sell a lot of assets which will potential deliver a large collective capital gain, you will likely benefit from selling some of your assets before the 5th April deadline and others after the deadline. If you'd like guidance on how to do this, please get in touch with your Sunny accountant.
Time your dividends
Dividends are paid at a lower rate of tax than income tax. If you might end up taking home more than £150,000 in the current tax year through the payment of a dividend, you could get out of paying the additional rate by not taking the dividend as a bonus until the following tax year. Alternatively, you may choose to bring income into the current tax year to avoid paying more the following year.
Take advantage of up-to-date accounting knowledge
There are additional schemes available to taxpayers wanting to reduce their liability which we'd be very happy to cover with you on a phone call or a visit to your or our premises.
The Marriage Allowance allows a person earning under £12,500 a year to pass on part or all of their personal allowance to their spouse. This has the potential to save your family £250.
There are also significant advantages offered to investors in the Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS). 50% income tax relief is offered with SEIS investments and 30% for EIS investments with loss relief and sheltered capital gains if the business you've invested in fails.
To speak with a Sunny representative about organising your financial affairs before year end to minimise the amount of tax you pay, please call us on 01623 559 362 or email us on [email protected] for professional tax advice and guidance.
For a free chat on how we can help you, please complete the contact form below and we will be in touch.