With the new tax year starting on 6 April 2020, now is the time to review both your businesses and your own personal tax, to make sure all tax reliefs and allowances available have been utilised in the current tax year. It is also an ideal opportunity to take a wider review of your circumstances and plan for the year ahead.
This will be of particular importance now, with the impact of COVID-19, many businesses will be reviewing their operations and looking at where they can increase efficiencies and make savings, including tax savings.
It is crucial that these reviews are undertaken as soon as possible, as you will need time to consider all the options, as many of the allowances and reliefs cannot be applied retrospectively after 5 April 2020.
If you require advice or guidance on tax planning as we reach the end of the tax year or indeed for the year ahead, please do not hesitate to contact our specialist tax team. We can provide a comprehensive review, tailored to individual needs and circumstances.
The summary below outlines some of the tax issues that you should now be considering, to ensure you utilise the maximum tax savings as possible and all reliefs and allowances available are being fully utilised:
Income Tax and National Insurance
The personal allowance for income tax this year is £12,500, which cannot be carried forward, so it is important to try and use this.
There may be a benefit of ensuring a salary is paid of at least the lower earnings limit National Insurance threshold of £6,136, to ensure that credit is obtained for the years contributions towards the state retirement pension. Furthermore, drawing a salary of up to £8,632 can maximise the use of personal allowances and reduce corporation tax, without payment of class 1 National Insurance contributions.
Dividends – A straight-forward point to consider is whether you have made full use of the tax-free dividend allowance of £2,000. This is available to everyone and not restricted by earnings, so if you are an owner-manager with profits available to distribute, taking a £2,000 dividend is a no brainer. If you haven’t yet taken advantage of this in the current tax year, consideration should be given as to whether it is advantageous to pay this before 6 April 2020.
Additionally, if you intend to pay a dividend greater than £2,000 in 2020/21 and haven’t used the full £2,000 tax-free allowance in the current tax year, consideration should be made to making part of this payment early.
It may also be advantageous to pay a larger dividend, rather than a salary above £8,632, as this may raise 1 National Insurance contributions.
Salaries – if you are considering paying a salary in the 2020/21 tax year above the thresholds mentioned above and haven’t in this year, it may be prudent to consider further payments before 6 April 2020 as an alternative.
Spouses and civil partners – An individual may be able to transfer 10% of their personal allowance to their spouse or civil partner, providing they both meet certain criteria. An election to do this can be made up to four years after the end of the year in which it relates.
Pensions – Pensions are generally very tax-efficient, with £40,000 being able to be paid in each year, If your income is less than £150,000 If your income exceeds £150,000, the amount you can put into your pension and receive relief is restricted. The lifetime allowance is currently £1.055m. Unused amounts can be carried forward and used in the following three years.
Inheritance Tax – Gifts of up to £3,000 a year can be made without any implications for inheritance tax, and this can be carried forward for one year.
Tax-efficient investments – ISAs are a tax-efficient way to save for higher rate taxpayers. The maximum allowance is £20,000.
You could also consider investing in Enterprise Investment Schemes and Seed EIS Shares. Tax relief is available when you subscribe to shares which meet the qualifying criteria for each scheme. Under the EIS scheme, tax liability for the year may be reduced by up to 30% of the amount invested. It also has the benefit that capital gains form disposals can be reinvested into the scheme, allowing a deferral of the gain.
Capital Gains Tax
The 2019/20 annual allowance is £12,000, which cannot be carried forward. It is always worth checking if this has been utilised correctly if you have disposed of any assets, including businesses and property. If you are in the process of selling a business or property, professional tax advice should be sought, as to the most tax-efficient way of structuring a deal.
If gains are made in the year, these can be set against any losses occurred in the same year. It is therefore worth considering disposing of any assets that are standing at a loss to balance these gains.
Annual Investment Allowances – the Annual Investment Allowance was increase in the 2018 Budget from £200,000 to £1m from January 2019. Currently, up to £1m of qualifying expenditure is available for 100% relief in the year it was incurred. This higher limit is due to expire on 31 December 2020. It is therefore crucial to ensure you have taken full advantage of this.
Private Residence Relief and Lettings Relief – If you are letting out a property that was once your only or main residence and are considering disposing of this asset at some point in the future, it may be prudent to consider doing so before the end of this tax year.
Private Residence Relief (PRR), which allows an additional grace period of the last 18 months of ownership, is being halved to nine months, whilst Lettings Relief is being withdrawn completely (unless you share your home with a tenant). If your property has increased in value since purchase, this could have a huge impact on your capital gains tax bill if you sell the property after 5 April 2020. More information on this can be found here.
Non-residents – Since 6 April 2019, non-residents have been liable for capital gains tax on gains made on property and land in the UK.
Capital Allowances – It is always important to review expenditure, which may qualify for Capital Allowances Relief. Alongside plant and machinery, this includes research and development (see below), patents, specific intellectual property and buildings and renovating business premises in specific areas, amongst other items.
There are strict deadlines for claiming capital allowances. Capital Allowances can offer very generous tax allowances of up to 100%, which can result in significant tax savings and these should be considered carefully.
Research and Development Tax Relief – Many businesses miss out on this generous type of relief as they incorrectly believe that they are not eligible to receive it. It is always worth taking advice to review your specific circumstances, to ascertain if you are eligible to claim.
A common misconception is that R&D tax relief only applies to science and technology companies, or those with specialist research and development departments. In fact, all industries can reap the benefits from R&D Tax Relief, providing the project either seek to advance their knowledge, improve a service or product or solve uncertainties in a process.
It is important to review this before the tax year-end as deadlines will apply, dependent upon when the work was completed.
Property Investment Businesses
For residential buy-to-let investors, mortgage interest eligible for tax relief at the higher and additional rates is restricted in 2019/20 to 25%. From 20/21 mortgage interest will be eligible only for income tax relief at the basic rate of 20%, regardless of tax bracket.
This may increase taxable income, increasing certain thresholds, which could reduce eligibility for child benefit, personal allowance or pension savings annual allowance, and push some taxpayers into a higher tax band.
For these reasons, it may benefit to consider the merits of setting up a limited company for buy-to-let properties that you hold personally. More information on this can be found here.
The government has confirmed that corporation tax will no longer be cut to 17% in 2020 and is to remain at 19%. If would be frugal to check that this has been included in any forward planning cash-flow calculations.
Other items to consider
The tax year-end also provides an opportunity to review your business activities, and to look at ways to be more tax efficient. Other items to consider include:
Accounting dates – is your own year-end date at the most useful point in the year for your company? Would it be advantageous to align this with a key date in your business calendar?
Incorporation – If you trade as a sole trader, a partnership or an LLP, it is a good point in the year to review your circumstances to ascertain if it would be more tax-efficient to incorporate as a limited company.
Contact Alexander & Co for further advice
For further advice and guidance, contact our expert tax team on 0161 832 4841 or fill out the form below and we’ll be in touch shortly.