With the end of the 2017/18 tax year approaching, now may be the ideal time to think about how you can minimise your business and personal tax liability before 5 April 2018. Here we outline some of the key areas to consider.
Maximising personal allowances
Every individual is entitled to their own personal allowance (PA), which is set at £11,500 in 2017/18. If your spouse or partner has little or no income, you could stand to benefit by spreading income more evenly to make sure that each PA is being fully utilised. Certain rules apply so please speak to us before taking action.
Certain married couples may also be eligible to transfer 10% of their PA to their spouse under the Transferable Tax Allowance, or 'Marriage Allowance'. This is available to married couples or civil partners where one earns no more than £11,500 per annum, and where neither pays tax at the higher or additional rate. It means £1,150 can be transferred in 2017/18, which could help to reduce a couple's tax liability by up to £230 in this financial year.
Utilising an ISA
Despite relatively low interest rates, for many individuals ISAs are still an attractive and tax-free way to save.
For 2017/18, the overall subscription limit for ISAs is £20,000, of which no more than £4,000 can be deposited into a Lifetime ISA. Savers are able to invest in any combination of cash or stocks and shares ISAs up to the overall limit. However, individuals are only able to pay into a maximum of one Cash ISA, one Stocks and Shares ISA, one Innovative Finance ISA and one Lifetime ISA.
Claiming capital allowances
Many businesses are able to make use of the Annual Investment Allowance, which applies to the first £200,000 of expenditure on most kinds of plant and machinery (excluding cars). The allowance applies to businesses of any size and most business structures. There are, however, provisions to prevent multiple claims.
In many cases, a purchase made just before the end of the current accounting year will mean that the allowances are available a year earlier than if the purchase was made after the year end.
Extracting profit tax-efficiently
There are many ways to ensure that profit is extracted from your business in the most tax-efficient way possible. Some business owners may opt to take dividends instead of a salary or bonus, as these are paid free of national insurance contributions. Conversely, a salary or bonus can carry up to 25.8% in combined employer and employee contributions.
Others may wish to incorporate their business, which could provide more scope for deferring tax than operating as a self-employed individual or as a partner. Employer pension contributions can also be a tax-efficient means of extracting profit from a company.
Making appropriate pension arrangements
More and more people are being encouraged to begin saving for their retirement, with the introduction of pensions automatic enrolment. However, if you are not in an appropriate employer scheme, it is essential to make your own arrangements
Tax relief is available on annual contributions limited to the greater of £3,600 (gross), or the amount of UK relevant earnings, but also subject to the annual allowance, which is typically £40,000. Pension contributions must be paid on or before 5 April 2018 to be applied against 2017/18 income.
Those with both net income over £110,000 and adjusted annual income over £150,000 will see their allowance tapered.
The pensions lifetime allowance for 2017/18 is £1 million. If total pension savings exceed the lifetime allowance at retirement, a tax charge will arise.
These are just some of the ways in which you may be able to reduce your tax liability ahead of the tax year end. As your accountants, we are able to advise on these and many other tax-saving strategies - please contact us for more information.