Tax Tips

Individuals

  1. Use your ISA allowance – If you have savings and investments make sure you use your annual ISA allowance each year. Although it might not seem that much,( it’s currently £15,000 for share based ISA’s and cash ISA’s ) someone using their full allowance every year since ISA’s were introduced in 1999 would have now be sitting on an investment pot of over £100,000 (excluding capital growth) which is entirely free of income and capital gains tax.
  2. Pay more into your pension now if you are a higher rate tax payer – In the run up to the budget every year there is speculation about whether the government will remove higher rate tax relief for pension contributions. This has yet to happen, and against a backdrop of the government’s commitment to encouraging everyone to pay more into their personal pensions this might be seen as counterproductive. However pension tax relief costs the government over £33 billion last year with more than half going to higher rate tax payers so given the terrible state of our national finances it remains a tempting option for the future. Under the current system someone currently earning £60,000 a year and paying £6,000 into their personal pension would get tax relief as follows
    • Your payment £6,000
    • Government adds 1/3 to your payment £2,000
    • You gain a further reduction in your tax bill £2,000
    • Total effective contribution £10,000

    So for every £60 you pay into your pension, the government contributes a further £40, which is a tax relief rate of almost 67%. The maximum an individual can pay in is currently £40,000.

  3. Transfer ownership of assets to lower income spouse or partner – If you are married or in a civil partnership review your income and assets to ensure that they are distributed in the most tax efficient way. For example if you own a rental property in your joint names, you can elect to split the income for tax purposes 95% to the lower earning partner and 5% to the higher earning partner by filing the appropriate form with HMRC and altering the legal beneficial ownership position. In the absence of this election the income will be taxed on your both equally.

Businesses

  1. Consider the timing of major asset purchases – As you approach the end of your financial year review any plans you have for buying high value new assets like vans or machinery in the near future and if possible ensure they are completed before the last day of the financial year. Spending £15,000 on a new van, even if it is bought on higher purchase, will generate a tax saving of £6,000 for a higher rate tax payer.
  2. Reduce your payments on account if your profits drop – your payments on account are based on your profits from the previous year, so if you are having a lean year you will end up overpaying tax during the year and not getting it back until up to 10 months later, which could put a lot of strain on your cash-flow. If you know your profits are going to be lower than last year you can make a claim to reduce your payments on account to more accurately reflect what you think your liability is likely to be.
  3. Register for the flat rate vat scheme – the flat rate scheme was introduced for businesses with turnovers of less than £150,000 to simplify the process of submitting vat returns. Rather than having to keep a track of both your output and input vat, under this method you just need to record your sales and then apply a percentage to this to determine the vat you need to pay over. The percentage you use is dependent on the nature of your business. In our experience many businesses gain a significant cash benefit by switching to the flat vat as well as saving time on record keeping. It is also sometimes advantageous to voluntarily register even though your turnover is below the registration threshold (£81,000).
  4. Consider the benefits of incorporation – profits are currently taxed at only 20% for companies compared to 29% for individuals. For a typical business with a profit of £30,000 incorporation would save over £2,000 in tax each year. You do need to consider the additional administrative costs of running a company, but these are far less than most people imagine these days and almost all can be carried out by us on your behalf if you wish. The average tax savings at  different profit levels are as follows