How To Make The Most Of Tax Allowances
It is always worthwhile at this time of year looking to see whether full advantage was being taken of all the available tax reliefs and allowances to reduce tax liabilities for the current fiscal year coming to an end on 5thApril 2019.
Unless action is undertaken on or before this date, the opportunity to save tax for the 2018/19 fiscal year will have been lost.
This not only concerns income but also capital transactions as each UK tax resident has a capital gains tax annual exemption in this year of £11,500 which will go to waste if it is not utilised.
A common area for tax mitigation is pension contributions.
Depending on the cash available, it may be advantageous for employees to consider making additional voluntary contributions to their pension scheme.
Payments must be made on or before the 5thApril for tax relief to be given in 2018/19. Individuals get income tax relief at source so they are regarded as having made a net of basic rate income tax payment to the pension fund. Higher rate relief can also be claimed by higher rate taxpayers via their tax return. This makes pensions contributions very tax efficient.
Owners of buy to let properties should consider whether it would be appropriate to make any repairs to their let properties so that tax relief on these expenses can be given in 2018/19 rather than having to wait a whole year if expenditure is delayed past 5thApril.
Director/shareholders of family companies are advised to make full use of the personal allowances and dividend allowances available for 2018/19. The dividend tax free allowance is £2,000 and the personal allowance is £11,850. If possible the two reliefs should be utilised as they enable tax free extraction of profits in any year.
Utilising in full the basic rate bands for income tax purposes (the next £34,500 of income on top of the £11,850 single person’s allowance) would be sensible if there are sufficient moneys in the company to do this. Although this gives rise to tax liabilities at 20%, if funds are required, it would be better to pay this rate rather than pay higher rates of tax which one would have to do if there was a need post the 5thApril and one was brought into higher rate tax at 40% because of this.
With capital gains tax, if you have been sitting on capital gains it might be sensible to consider selling the shares or securities to realise the gain in order to utilise the annual exemption of £11,700. Any capital losses need to be taken into account because these are offset against capital gains first of all before the annual exemption is utilised.
A spouse’s situation needs to be taken into account as well potentially when a director/shareholder is concerned as commonly a spouse will also hold an office and have shares in a company, enabling them to utilise their own reliefs
Besides dividend and salary methods of extracting profits from a family company, it may be possible to pay rents for properties used by a company but owned by individuals. This is a highly tax efficient method of extracting profits but the rent needs to be no higher than market value.
Interest on loans made to a family company could be interest-bearing and offer an opportunity to extract profits tax efficiently from a company in the form of interest, given the £1,000/£500 exemption that exist for interest for basic rate and higher rate tax payers respectively.
Around this time of year financial advisers always suggest making use of the Isa limits to transfer existing shareholdings or cash deposits into these highly tax efficient, tax exempt wrappers. The limits are now generous (£20,000 for 2018/19) and allow not only the income to grow without tax but also any capital gains realised in an Isa are exempt from capital gains tax.
Although the above are quite small things in certain respects, they do offer the opportunity to save quite legitimately save hundreds and in some cases few thousands of pounds of tax. These reliefs and allowances are meant to be used.
Those of a charitable mind-set might appreciate that the tax savings could be shared with their favourite registered charity or charities as the recipient charity can claim the basic rate relief back from HMRC and if you are a higher rate tax payer, you can reduce the overall net of tax cost of the gift you are making due to higher rate relief being given for charitable contributions.
So spending half an hour every year to look at one’s personal tax situation can work out very cost effective.