Forward tax planning might not be at the front of your mind right now, but the end of the 2016/17 tax year, April 5, 2017, is just around the corner. If you made a New Year’s resolution to get a tighter grip on your finances this year, now’s the time to act – before it’s too late.
For those in business there’s plenty to think about. Starting first with Income Tax, watch out if you’re approaching a tax threshold, or find yourself in a marginal relief band. If you are one of those lucky souls, you may want to act to put your tax affairs into order before 5 April 2017.
There are several thresholds for the 2016/2017 tax year that you need to be aware of. Breach any and you’ll pay more tax:
■ Higher rate income tax band. Anything over £43,001 is taxed at 40 percent.
■ High income child benefit charge threshold which means that child benefit begins to be clawed back once income exceeds £50000.
■ Personal allowance reduction threshold where the personal allowance of £11,000 is reduced by £1 for every £2 above £100,000.
■ Additional rate income tax band where income above £150,000 is taxed at 45 percent
In addition, two new tax allowances became available from 6 April 2016. They’re good news for some, but mixed blessing for others, so it’s well worth being aware of them.
So, bearing these thresholds in mind, there are some legitimate tax planning options to avoid an eye-watering tax bill including:
■ Deferring your income to the following year if you expect a lower level of income then;
■ Making pension contributions for yourself and your family;
■ Transferring shares or bonds to your spouse to make the most of the dividend nil band and savings allowance;
■ Switching your investments into tax-efficient investment schemes; and
■ Making donations to charity.
There are several ways to reduce a business owner’s tax bill while keeping essential cash in the business.
Carry back trading losses
If you’re self-employed, any trading losses that you make in the year can either be set against your other income as a current year tax deduction, or carried back against income in the previous tax year to reduce your previous year’s tax liability (and gain a cash tax refund).
In terms of Corporation Tax, the Finance Bill 2017 will reform the loss relief mechanism from April 2017. On a positive note, it means you will be able to offset trading losses against all types of past or future profits. However, the loss that you can offset in any given year will be restricted to 50 percent of the taxable profits for that year.
Optimising your capital losses
Next, any capital loss you make from selling your assets in 2016/17 will automatically be set against your taxable income for that year first. After that, you can elect for any remaining capital loss to be carried back to the previous year, or do nothing and let the loss be carried forward indefinitely against future years.
Tax-free pension contributions
For most people, making pension contributions is a tax- efficient way to put money aside. Not only do you get tax relief on your pension contributions, recent changes have also made pension schemes more flexible, allowing you to draw down the pension pot before retirement.
When you pay into a pension, you receive tax relief on your pension contributions. The tax relief is at the highest rate of income tax that you pay. There are limits to what can be paid in.
As a business
If you own your own company, making pension contributions to yourself is a great way to extract value from your business.
On top of the personal income tax relief, pension contributions give corporation tax deductions to the company. Further, because pension contributions are a non-taxable benefit, both the company and the employee can save on national insurance contributions. As an employer and company owner, it’s well worth thinking about exchanging some of your and your employees’ salaries and taxable benefits for larger pension contributions.
If you have a large pension pot (over £1m) or have a taxable income over £110,000, new changes from 2016 can affect you, so think about seeking professional advice.
GETTING MORE OUT OF YOUR INVESTMENTS
Lastly, with interest in high- street banks still standing at an all-time low, you may be considering ways of making your money work harder for you. Some investments might prove a tax-efficient alternative to savings, if you have the appetite for risk.
One recommendation would be to load up your ISAs, to benefit from tax-free income and capital gains. Adult UK residents can put up to £15,240 each into savings, investments or a combination of both. In addition, parents can pay up to £4,080 per child into a junior ISA.
First-time buyers can now save up to £200 per month over four years in the new help-to- buy ISA, and get a 25 percent tax-free bonus capped at £3,000 for £12,000.
There are also several other tax efficient investment schemes such as the enterprise investment scheme, investing directly in an unlisted company, venture capital trusts, the Seed Enterprise Investment Scheme, Innovative Finance ISAs, and social investment tax reliefs. It’s worth noting that they are high risk, so consider these options only if you are a seasoned active investor.