Some of the most frustrating conversations you can have with your accountant are around hindsight. “If you did this, you would have saved that …” which naturally brings the response “why didn’t you tell me earlier?”
A part of this is how your accountant works; are they proactive, or reactive? Do they meet regularly, answer their calls and reply promptly? Or are you waiting two to three weeks for a response that usually leaves you with more questions than answers? I have strong views on all of this as you could imagine. A huge focus of mine is improving client experiences and making sure we are bringing this sort of support and advice systematically, reliably, but with personality, to everyone who works with us. We have plenty of projects in the pipeline to deliver on to get there, but we are always making progress.
A second part is that as a business owner, or an individual, taking personal responsibility and ownership of your own financial position is incredibly important, too. I encourage my clients to learn and challenge independently what is being done and it’s those who are most engaged where we see the best results.
This aside, as we enter March, now becomes an important time to plan as a business and an individual. Quite simply put, once the tax year is closed, you are incredibly restricted with things you can do to reduce a tax bill after the event. You cannot rewrite history, but you can think now about things that might save your tax. Here are five things you should consider which might save you a little bit of tax.
All of these points are ‘use-it-or-lose-it’ allowances that reset each tax year and most of these need the support of either an accountant, a financial advisor, or ideally both.
Making Pension Contributions
I am a big fan of pension contributions. They come loaded with tax benefits and can make a notable difference in tax bills where, working with a decent financial advisor, clients have swung huge tax bills around thanks to making private contributions.
As an individual, making private contributions has the effect of increasing your basic rate band. This means that in particular for higher rate taxpayers and above, more of your income is taxed at the lower rate of income tax meaning you could be saving the difference between a higher rate (40% vs 20%) or an additional rate (45% vs 20%) tax.
For Companies, there is a benefit too. Pension contributions, as long as they are part of a reasonable remuneration package, are deductible for Corporation Tax.
Whilst I cannot provide financial advice, a good financial advisor will highlight to you all the benefits which come with making proper investment decisions and the benefits of compounding in making sure you are in the best place for your retirement.
Consider your March payslip, if you have any bonuses due and whether you can make a contribution. Equally, as a business, if you have cash, see whether it is viable to make a contribution to your staff and the Directors.
Currently, there is a £2,000 dividend allowance that everyone has.
This means if you are a Director and Shareholder of your own business and have reserves available, you can declare a dividend and recipients will not pay tax on the first £2,000 of dividends they are paid. Most owner-managed businesses running Limited Companies probably utilise dividends as a method to pay themselves, so may have already claimed this allowance.
However, if you are not in need of extracting cash from the business and that business is profitable, whilst it’s understandably prudent to keep reserves in the business, consider extracting funds periodically to make the most of this allowance. They can always be reintroduced as a loan or capital by the Director at a later date, but it means you have not wasted your allowances in the meantime.
Everyone has a £20,000 ISA allowance each year which again is reset with each new tax year. ISAs are special ways to shelter savings in an account where any gains (capital gains or interest) are sheltered from capital gains tax or income tax.
If you are sitting on savings, it may be beneficial for you to move these savings into an ISA where they can build value without incurring tax.
You can typically invest either in cash or stocks and shares ISAs, each with different levels of risk attached to them. Again, this is where an astute Financial Advisor comes in to help you make the right investment decisions.
Capital Gains tax-free allowance
Capital gains are taxed whenever you dispose of certain assets for profits. Depending on whether your assets are shares, property, or even cryptocurrency and dependent on your income, you may pay anything from 10% to 28% on profit on any disposals.
Everyone has a tax-free allowance of £12,300 which like everything else above is reset at the start of each tax year.
Whilst capital gains taxes can be complex and there are other allowances and considerations around them, we have also helped clients with some much more straightforward approaches.
One client who is seeking to dispose of a property portfolio is timing the disposals so they sell one property each year, thus making effective use of their allowances over time. Another tactical method of disposal could be considered, for example, if you are able to part-dispose of assets promptly on either side of the tax year, you can effectively make the most of your allowances over two tax years. This may be beneficial for shares for example.
Again, a similar theme as with ISAs and Pensions, where investment decisions are being made, seek proper advice and make sure you consider all aspects before you make a disposal, not just the tax.
Interest is taxed as a form of income, but everyone has a tax-free allowance, called the Personal Savings Allowance they can use each year. How much of this allowance depends on your earnings;
- Basic rate payers can earn up to £1,000
- Higher rate payers can earn up to £500
- Additional rate payers have no allowance
You can also benefit from a starting rate for savings, up to a maximum of £5,000, but this allowance tapers away for each £1 above your personal allowance.
The benefit of this is circumstantial, but where clients have seen the most use of this is when they’ve provided loans to Companies they run and the Company has paid back their loans with interest. This is then a deductible expense for the business but could be tax-free income for the individual as well. There’s a specific process to do this, so please speak to a professional before undertaking it.
Avoiding the 60% rate
I’ve written before about the effective 60% rate where your personal allowance begins to fall for £1 in every £2 after £100,000. Income tax rises at an incredibly sharp rate at this point, so if your income is in and around this area, these planning tips will be extremely effective.
A little word on spouses
These allowances are based on individuals, hence if you have a spouse, you can effectively double your allowances.
I do always express caution with this and would always recommend you seek advice. In some cases, a 50/50 split may not achieve the best tax result because of other factors. In other situations, forms, declarations, or even the advice of solicitors may be required. The ideal advice here is to plan ahead with your family so you are proactively using your allowances and this fits around your circumstances.
If you want to try and avoid another huge tax bill and want to speak to an accountant who can guide you through these suggestions and more, please reach out to us today for help.