As the end of the tax year draws closer, it is important to review your financial planning strategies. By taking action before the year end, you can ensure that your affairs are as tax-efficient as possible.
This blog considers some possible tax-efficient planning strategies that you might wish to consider implementing before 5th April 2019. This includes:-
- Making the most of tax-efficient savings and investments
- Estate and inheritance tax planning strategies
- Making the best use of capital allowances
- Extracting profit tax-efficiently.
Financial planning should ideally be an ongoing, year-round activity. For further advice and information on tax-efficient planning, up to 5 April 2019 and beyond, please get in touch with the DRG Chartered Accountants tax team
Tax planning across the family
As part of your financial planning strategy, you might want to take full advantage of the allowances available across the family.
Making the most of personal allowances
Each individual is entitled to their own personal allowance, which for 2018/19 is £11,850 (rising to £12,500 for 2019/20). If your spouse or partner has little or no income, you might want to consider spreading your income more evenly to ensure that you make full use of each personal allowance. This may involve transferring income or income-producing assets – but be mindful of the settlements legislation governing ‘income shifting’. Any transfer must be an outright gift, with ‘no strings attached’.
Certain married couples may also be eligible to transfer 10% of their personal allowance to their spouse. The Marriage Allowance is available to married couples and civil partners where one spouse has income below the personal allowance and neither spouse pays tax at the higher or additional rate. It means £1,190 can be transferred in 2018/19, reducing a couple’s tax liability by up to £238 in the current year. Children are also entitled to their own personal allowance.
Reducing your taxable income
You can also look to reduce your taxable income by increasing contributions into a pension scheme or making charitable donations via Gift Aid. This may be beneficial if you or your spouse or partner are receiving Child Benefit, and either of your adjusted net incomes are expected to be between £50,000 and £60,000. It may help to eliminate the High Income Child Benefit Charge, which applies at a rate of 1% of the full Child Benefit award for each £100 of income between £50,000 and £60,000. You might also adopt a similar strategy if your income is just above £100,000, as the personal allowance is reduced by £1 for every £2 of income over this figure.
Making the most of capital allowances
When you buy a tangible asset, such as business equipment, the cost of the asset can be offset against the profit by claiming capital allowances.
The majority of businesses are able to claim a 100% Annual Investment Allowance (AIA) on the first portion of expenditure on most types of plant and machinery (except cars). The AIA applies to businesses of any size and most business structures, but there are provisions to prevent multiple claims.
In the 2018 Autumn Budget, the Chancellor announced an increase in the AIA from £200,000 to £1 million, which applies to expenditure incurred from 1 January 2019 to 31 December 2020. Complex calculations may apply to accounting periods which straddle these dates. It is therefore important to time the purchase of plant and machinery carefully, in order to make the most of the increase.
Enhanced Capital Allowances (ECAs) aim to encourage ‘greener’ investment by providing 100% first year allowances for some investments, including energy-saving equipment and low CO2 emissions cars (up to 50 g/km from 1 April 2018).
Expenditure not covered by the AIA or ECAs enters either the main pool or special rate pool, attracting writing down allowance (WDA) at a rate of 18% or 8% respectively. The special rate 8% pool includes cars with CO2 emissions exceeding 110 g/km, long life assets and certain specified integral features of buildings. The 2018 Autumn Budget revealed that the rate of WDA on the special rate pool of plant and machinery will be reduced from 8% to 6% from 1 April 2019 for businesses within the charge to corporation tax and 6 April 2019 for those within the charge to income tax. Again complex calculations may apply to accounting periods which straddle these dates.
Typically, a purchase made just before the end of the current accounting year will mean the allowances will usually be available a year earlier than if the purchase was made just after the year end. In the same way, the disposal of an asset may trigger an earlier claim for relief or even an additional charge to tax.
In addition, a new capital allowances regime has been introduced for structures and buildings. The Structures and Buildings Allowance will apply to new non-residential structures and buildings. Relief will be provided on eligible construction costs incurred on or after 29 October 2018, at an annual rate of 2% on a straight-line basis.
Holding on to more of your profit
If you run a business, you might like to consider some of these strategies for extracting profit tax-efficiently.
Corporation tax is the tax due on a company’s profits, while personal income tax generally applies to what is drawn out of the company by means of a salary, bonus or other forms of remuneration.
Taking a dividend versus a salary/bonus
Following recent changes to the dividend regime, the question of whether it is better to take a salary/bonus or a dividend requires careful consideration.
A dividend is paid from the profits available after corporation tax is paid, whereas a salary or bonus is generally tax deductible for the company. Looking at national insurance contributions (NICs), a salary or bonus can carry up to 25.8% in combined employer and employee contributions, while dividends are paid free of NICs.
The current Dividend Allowance (DA) is £2,000 a year – this fell from £5,000 in April 2018. The DA charges £2,000 of the dividend income at 0% tax – the dividend nil-rate. The rates of tax on dividend income above the allowance are: 7.5% for basic rate taxpayers; 32.5% for higher rate taxpayers; and 38.1% for additional rate taxpayers. So while there may still be potential benefits for a director-shareholder taking a dividend over a salary, the amount of tax saved has been reduced.
Other ways of extracting profit
You may also want to consider some alternative means of extracting profit from your business. These might include:
- Pension contributions
Employer pension contributions can be a tax‑efficient means of extracting profit from a company
- Considering incorporation
If you are self-employed or a partner, incorporating may provide more scope for saving or deferring tax – but be sure to talk to us first
- Making the most of tax-free allowances
Don't forget mileage payments, which apply when you drive your own car or van on business journeys
Where property which is owned by you is used by the company for business purposes, you are entitled to receive rent up to the market value. However, there may be tax implications to consider, so care needs to be taken.
If you wish to discuss extracting profit tax-efficiently from your business, please do get in touch with the tax team at DRG Chartered Accountants.
Planning ahead for retirement
Despite the introduction of pensions auto-enrolment, many individuals still run the risk of facing an income shortfall upon retirement.
If you are not in an appropriate employer scheme, it is essential to make your own arrangements. There are some restrictions and allowances that you need to consider when making pension contributions, and for contributions to be applied against your 2018/19 income, they must be paid on or before 5 April 2019.
The amount of annual pension contributions on which tax relief is available is restricted to the higher of £3,600, or the amount of UK relevant earnings. Additionally, any contributions in excess of the annual allowance of £40,000 will generally be taxable.
Your annual allowance can also be tapered if you have a net income of over £110,000 and an adjusted annual income (your income, plus your own and your employer’s pension contributions) over £150,000. For every £2 of adjusted income over £150,000, an individual’s annual allowance is reduced by £1, down to a minimum of £10,000. Where pension savings in any of the last three years’ pension input periods (PIPs) were less than the annual allowance, the ‘unused relief’ can be brought forward.
Finally, the overall tax-advantaged pension savings lifetime allowance is £1,030,000 for 2018/19. This will increase to £1,055,000 from April 2019. Where total pension savings exceed the lifetime allowance at retirement (and fixed, primary or enhanced protection is not available), a tax charge arises.
When planning for your later years, don’t forget to review the other options that may be available. You might, for example, want to consider the role of your business and/or your home in boosting your retirement fund, as well as the Lifetime ISA.
Don’t forget your ISA allowance
There are now a number of different types of ISA on the market, including the Lifetime ISA for adults under the age of 40; Help to Buy ISAs for first-time home buyers; and Junior ISAs for those aged under 18.
The rules governing ISAs
Individuals can invest in any combination of cash or stocks and shares up to the overall annual subscription limit of £20,000. However, a saver may only pay into a maximum of one Cash ISA, one Stocks and Shares ISA, one Innovative Finance ISA, one Help to Buy ISA, and one Lifetime ISA. You have until 5 April 2019 to make your 2018/19 ISA investment.
The Lifetime ISA
The Lifetime ISA can help individuals to save towards their retirement or for a first home and is available to adults under the age of 40. Those eligible can deposit up to £4,000 into a Lifetime ISA each tax year. They will then receive a 25% bonus from the government on any savings put into the account before their 50th birthday.
Both the tax-free savings and the government bonus can be used towards a deposit for a first home in the UK worth up to £450,000 at any time from 12 months after first saving into the account. Alternatively, the funds may be withdrawn from the Lifetime ISA from age 60, tax-free, for any purpose.
Taking out cash or assets from the Lifetime ISA for any other reason will mean you are subject to a 25% withdrawal charge. This aims to recover the government bonus. An exception to this is if you are terminally ill with less than 12 months to live, in which case you are allowed to withdraw from this ISA without facing any penalties.
Help to Buy ISA
This offers a tax-free savings account for first-time buyers saving for a home. Savings are limited to a monthly maximum of £200, with the option to deposit an additional £1,000 on top of this, on opening the account. The government provides a 25% bonus on the total amount saved including interest, capped at a maximum of £3,000 on savings of £12,000, which is tax-free.
The bonus can be put towards a first home located in the UK with a purchase value of £450,000 or less in London and £250,000 or less in the rest of the UK.
16 and 17-year-olds can invest in an adult Cash ISA. A Junior ISA is available to all UK resident children under 18 as a Cash or Stocks and Shares product or both. Junior ISAs are owned by the child but investments are locked in until adulthood.
2018/19 ISA limits
|Cash, Stocks and Shares ISA||£20,000 a year|
|Junior ISA||£4,260 a year|
|Help to Buy ISA||£200 a month, with the option to invest an additional £1,000 in the first month|
|Lifetime ISA||£4,000 a year with no monthly maximum amount|
Minimising the inheritance tax take
Inheritance tax (IHT) receipts have reached a record high, and there may be times when the existing nil-rate bands may not cover the full value of an individual’s estate. It is essential, therefore, to plan ahead to minimise your exposure to IHT wherever possible.
IHT: an overview
The standard rate of IHT is charged at 40% on the proportion of an individual’s estate which exceeds the nil-rate band of £325,000. An estate includes both the value of chargeable assets held at death plus the value of any chargeable lifetime gifts made within seven years of death.
The residence nil-rate band (RNRB) also applies where a residence is passed on death to direct descendants. The band is set at £125,000 in 2018/19, rising to £150,000 in 2019/20 and £175,000 in 2020/21. Combining the two nil-rate bands would mean that an individual does not have to pay IHT on up to £450,000 of their estate in 2018/19.
The additional band can only be used in respect of one residential property which has, at some point, been a residence of the deceased. For estates with a net value of more than £2 million, the RNRB is tapered at a withdrawal rate of £1 for every £2 over this threshold.
Transfers between spouses
Transfers of assets between spouses or civil partners are generally exempt from IHT, regardless of whether they are made during a person’s lifetime or on their death. In addition, both the nil-rate band and the RNRB may be transferable between spouses and civil partners. This means that if the bulk of one spouse’s estate passes on their death to the survivor, the proportion of the nil-rate band and the RNRB unused on the first death goes to increase the total nil-rate band and RNRB on the second death.
Other exempt transfers
Other transfers which are exempt from IHT include:
- Small gifts (not exceeding £250 per tax year, per person) to any number of individuals
- Annual transfers not exceeding £3,000 (any unused amount may be carried forward, to the following year only)
- Certain gifts in consideration of marriage or civil partnership
- Normal expenditure out of income
- Gifts to charities.
Making a series of lifetime gifts can also significantly reduce your estate’s IHT liability. As long as you survive the gift by seven years and no longer continue to benefit from the gift yourself, it will escape IHT. Gifts also have the advantage of allowing you to witness your family members benefitting during your lifetime.
A discount, known as taper relief, can also apply where lifetime gifts were made between three and seven years before death. Please note that the discount applies to the tax on the gift rather than the gift itself.
Many IHT reliefs are available, including relief on business and agricultural property, which effectively takes most of such property outside the IHT net, although detailed conditions apply.
Trusts can be used to help maintain a degree of control over the assets being gifted, which is especially useful in the case of younger recipients. Life assurance policies can be written into trust so that the proceeds will not form part of the estate on your death.
It is particularly important to review your Will following changes in your personal or family circumstances, or the introduction of significant new tax rules.
If you would like to discuss possible year-end strategies for you and your business, please do get in touch with our team of tax specialists at DRG Chartered Accountants.
DISCLAIMER: This information is for guidance only, and professional advice should be obtained before acting on any information contained herein. We will not accept any responsibility for loss to any person as a result of action taken or refrained from in consequence of the contents of this publication.