Tax saving ideas
Wednesday, 06 February 2019
Now tax returns are hopefully out of the way, it’s an ideal opportunity to think about some potential tax saving ideas.
Capital allowances can be claimed on a wide range of qualifying capital assets, including office equipment, fixtures and fittings and potentially motor cars or vans. A variety of allowances are currently available, some of which give an immediate reduction in taxable profits of 100% of the allowable expenditure. Whilst it’s not a good idea to just buy capital items for the sake of saving a bit of tax, if you’re thinking of changing a computer, for example, it’s better to do so before your year end. This gives you an earlier tax allowance than delaying it until after the year end.
Pension contributions are tax efficient for both employers and employees/directors. Company contributions to an employee‘s pension will attract corporation tax relief, and will be free of income tax and National Insurance for the employee (up to certain limits).
If you’re self-employed, as an individual you benefit from income tax relief on contributions to personal pension schemes, subject to certain limits. This may be particularly useful if you pay higher rates of tax.
Pension contributions can be made in a number of ways to get tax relief, such as via Small Self-Administered Pension Schemes (SSAS) or Self Invested Personal Pensions (SIPP). Auto-enrolment has pushed employers to provide a pension for their employees, although a business owner may want more flexibility in the way they save for their own retirement. Directors of small businesses should think about what's best for them and their company when picking a pension.
Married couples should consider transferring income-generating assets to their spouse in order to maximise the use of their tax free personal allowances. This is effective where one party pays income tax at the higher rates and the other is a non-taxpayer or basic rate taxpayer. Married couples should review the ownership of income-producing assets such as investments, rental property, bank accounts or private company shares, and get advice on how ownership can be varied so income can be shared to best post-tax effect.
In certain circumstances, it’s also possible to transfer 10% of your personal allowance to your spouse. This is beneficial if one spouse has taxable income below the personal allowance.
Gift Aid donations can reduce the amount of income tax high earners pay at the additional rate of 45%. However, if you pay little or no tax, think carefully before signing Gift Aid donations. If a charity claims tax back from your donation, when you have not actually paid any tax, HMRC may well come after you!
Individuals with a total income in excess of £100,000 lose their personal allowance. To preserve some or all of this, they could make personal pension contributions. Alternatively, at this income level, and assuming it’s possible, it may be worthwhile deferring earning income.
With the nil rate band remaining frozen in recent years, gifting during lifetime has become increasingly important for those wishing to reduce the amount the Government takes from your estate upon death. Many think that they won’t be here to worry or that it doesn’t affect them. Whilst house prices are not increasing like they were a few years ago, the value of a house may still bring you within the clutches of Inheritance tax (IHT). Do you really want a significant portion of your estate to go to the Government rather than your chosen beneficiaries?
The exempt transfers for IHT purposes include the annual transfer of £3,000, small gifts of up to £250, gifts in consideration of marriage and normal expenditure out of income.
Tax efficient investment
Investors can reduce their annual income tax bills by making investments through Venture Capital Trusts, Enterprise Investment Schemes and Seed Enterprise Investment Schemes. Capital gains tax deferral relief/exemption may also apply.
As always, we would recommend that you seek professional advice before taking action, either from your accountant, an independent financial advisor, or both.
If you have any queries or would like more information, you can contact me on 01473 833411 or firstname.lastname@example.org