Complimentary Tax Planning Ideas
1. Income Tax & National Insurance
a. Tax Efficient Investments
There are various methods of reducing income tax utilising tax efficient investments such as NISA’s, where the limits for subscription have become far more attractive than in the past.
Please also see below regarding the attractions of the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS).
We are able to put you in touch with trusted Independent Financial Advisers (IFA’s) who can help you choose the best investment products in the market to meet your needs.
Where a person runs their own business, there can be scope to save income tax by ensuring that all expenses are claimed fully such as those in relation to mobile telephones, use of home as office, work related training, and business travel & subsistence, but avoiding tax pitfalls that can lead to expensive tax enquiries.
Are you making the most of you annual contribution allowance? 100% of the contribution of salary into pension pot (up to £40k in 2017-18) is allowed as deductible from taxable income, with potential scope to maximise contributions and increase tax savings by using unused allowances of previous years.
The annual allowance may be reduced by £1 for every £2 of adjusted income over £150,000 to a minimum of £10,000.
d. Sole trader to company
If you are sole trader, significant savings can be made by selling your sole trader business to a newly formed Limited Company if you are earning over £25k per annum.
e. Director’s loan account and dividend taxation
32.50% tax is payable on any overdrawn Directors loan accounts. With appropriate planning, this can be reduced.
f. Overpayment Relief Claims
It is possible to make a claim for overpaid tax where perhaps you fall into the following circumstances:
- You paid professional subscriptions and did not get any tax relief at the time;
- You made pension contributions and did not include any amounts not already relieved at higher rate in your Self-Assessment form;
- You used your own car for business travel but never claimed back any mileage from your Limited Company or your employer.
- A claim can be made for up to four years historically and repayments can therefore be substantial. The claim must be made in a prescribed format and we can do this for you.
2. Inheritance Tax (IHT)
Gifts and the Nil Rate Band
With appropriate planning it is possible to reduce or eliminate inheritance tax. For example, if your estate is worth more than £325,000 (individual).
If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren, your threshold will increase to £425,000.
If you're married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner's threshold when you die. This means their threshold can be as much as £850,000.
Taper relief reduces the IHT payable on death over a period of 7 years and if you survive the gift by 7 years then it becomes totally exempt from IHT.
Trusts are often a good way of giving away certain assets such as business shares without crystallising immediate charges to tax. Trusts can ensure you retain some element of control over how the dividends are utilised and these can even be used to pay child school fees tax efficiently.
Inheritance Tax - Gift Exemptions
There are specific ways to benefit from this exemption to say, bequeath. You can give away gifts worth up to £3,000 in total (say £500 to 6 individuals) in each tax year and these gifts will be exempt from Inheritance Tax (you can carry forward any unused part of the £3,000 exemption to the following year hence if you have not gifted anything in previous year you can give gift up to £6,000 in current year).
Gifts out of ‘regular income’ that do not impact on standard of living can also avoid inheritance tax, where gifts are made routinely.
There are other exemptions available if you wish to give gifts to children in consideration of marriage.
3. Capital Gain Tax (Income Tax / National Insurance*)
a. Annual Exemption
The 2017/18 capital gains free amount for any person (not companies) is £11,300. This means that you are able to dispose of investments and certain other items of value, making an overall profit of up to £11,300 tax free. You can therefore plan to utilise this exemption carefully so that no tax liability arises.
b. Inter-Spouse Transfers
Gifts between spouses and civil partners are exempt from tax and can be used in planning to maximise CGT allowances and tax rates.
c. Business asset roll over relief
Relevant to trading companies who sell any asset or goodwill to acquire another asset. Business Asset Rollover Relief lets you defer any Capital Gains Tax due when you dispose of certain assets (called ‘old assets’). If you use the whole amount you receive from the disposal of the old assets to acquire new assets, the whole of your gain will be deferred by deducting it from the cost of the new assets.
d. Entrepreneur’s relief
This reduces a capital gains tax bill, and must be claimed. It can also be used in planning for retirement.
It is available to individuals or trustees of settlement on qualifying gains for disposal of any of the following:
- all or part of a business
- the assets of a business after it has stopped trading
- shares in a company
Capital gains tax will be charged at 10% instead of 20%. Timing is key and therefore if you are considering any of the above then you should speak to us immediately to ensure you are well within the deadlines for making such claims.
e. Buy back of shares
This is a form of retirement planning linked to entrepreneurs’ relief.
f. EIS and SEIS Investments*
Investments in certain sectors are eligible for substantial relief against other sources of income for the investor. EIS is designed to help smaller, higher-risk companies raise finance by offering tax relief on new shares in those companies that qualify. For the investor, it’s a tax efficient way to invest in small companies. EIS is aimed at the wealthier, sophisticated investors. People can invest up to £1,000,000 in any tax year and receive 30% income tax relief. However, they are locked into the scheme for a minimum of three years. EIS seeks to encourage investment into unlisted companies.
It is also possible to defer capital gains tax by investing in EIS investments.
SEIS investments are a generous derivative of EIS and were introduced in April 2012. This Government scheme aims to encourage seed investment in early stage companies. Investors, including Directors, can receive initial tax relief of 50% on investments up to £100,000 and Capital Gains Tax (CGT) exemption for any gains on the SEIS shares. Similarly, investments may be used to defer capital gains.
4. Miscellaneous Ideas
a. Invoice factoring
The effective rate of interest for invoice factoring is up to 35 to 40%. Financing under the enterprise guarantee scheme for profit making companies with little security to offer can be availed of to reduce the punitive costs of factoring.
b. Consolidation of loans
Expensive loans or unaffordable repayment plans can be replaced by fit for purpose loan products, generally at lower interest rates.
c. Annual Investment Allowance
The Annual Investment Allowance is a type of capital tax allowance that offers a 100% write off against profits of money spent on plant and machinery in the year of purchase. It is available to businesses regardless of their size, but is subject to certain caps.
d. Research and Development Allowance (RDA)
SMEs are allowed additional deduction of 100% on research and development costs. R&D Tax Relief only applies to revenue expenditure – generally, costs incurred on day-to-day operations, as opposed to expenditure on capital assets. However, RDAs allow relief for R&D capital expenditure as a capital allowance. RDAs make it possible to claim 100% of the capital cost against taxable profits in the year the cost is incurred. This can deliver a helpful cash flow boost and a shortened payback period. A company should consider applying for RDAs if it has for example:
- constructed or purchased a laboratory, test bed, or pilot plant
- capitalised large amounts of R&D expenditure
Where a company is loss-making and does not anticipate profits in the immediate future, then it is possibly to sacrifice the R&D tax credit relief for a repayment equal to up to 14.50% of the loss surrendered. Obviously this is less than the tax relief due if the loss is set against profits, but does create a cash-flow advantage for the business.
e. Employee Reward and Incentives
The government announced legislation setting the Corporation Tax main rate at 19% for the years starting the 1 April 2017, 2018 and 2019 and at 18% for the year starting 1 April 2020 at Summer Budget 2015. At Budget 2016, the government announced a further reduction to the Corporation Tax main rate for the year starting 1 April 2020, setting the rate at 17%.
We can look at a number of planning options to reduce tax for you and your business via the following:
- zero emissions cars/vans
- training paid for by the company
- childcare facilities/ vouchers
- free/subsidised workplace meals
- discount portals open to all employees, giving access to group buying power and securing good cashback offers and cost discounts
- life assurance and critical illness cover for employees (in conjunction with an IFA)
- cycle to work schemes.
If you are interested in any of the above then please get in touch with us via our Contact Us page indicate your area of interest and provide a brief description of the nature of your interest.