Tax-saving tips for individuals and entrepreneurs
When it comes to tax, change sometimes feels like the only constant. With the annual Budget plus the Autumn Statement just a few months later (dubbed the ‘mini budget’), there are always new rules to understand and put into practice.
There are plenty of ways you can reduce your tax bill and we take a look at them here.
Individuals, couples and families
- The annual personal tax allowance for individuals of all ages increases to £11,000 from April 2016 (unless you earn over £100,000. In which case you lose part/all of your entitlement to the personal allowance). Unused personal allowance can’t be rolled over to the next tax year, so it’s a case of ‘use it or lose it’. Consider if you have the capacity to earn more income tax-free.
- The rules around dividend taxation have changed and from April 2016, individuals can receive up to £5,000 tax-free. Dividend income falling into the basic rate band is taxable at 7.5% and at 32.5% in the higher band (and then 38.1% in the additional rate band). Due to the abolition of the dividend tax credit, the new rules will tend to favour basic rate earners and of course those receiving less than £5,000 in dividends. Business owners will need to revisit the most tax-efficient way of extracting profits from the company.
- Do you have any assets to sell such as shares or personal possessions? For many such items, gains arising on disposal will be covered by the capital gains tax annual allowance which currently stands at £11,100. And don’t forget that if you can use losses carried forward from previous year to offset against future capital gains.
- A spousal exemption exists providing tax advantages to couples transferring assets between themselves.
- From April 2016, basic rate taxpayers can earn up to £1,000 in savings income tax-free and higher rate payers up to £500. If you’re an additional rate taxpayer (earn in excess of £150,000 pa), you won’t receive a savings allowance at all.
- Consider paying into a tax-free Individual Savings Account and earning tax-free interest in conjunction with receiving investments in light of the new savings allowance above. Also worth considering are Enterprise Investment Schemes, SEIS and Venture Capital Trusts which come with a higher level of risk but attractive income tax and capital gains tax exemptions.
- The Marriage Allowance permits married couples and those in a civil partnership to transfer up to £1,100 (in 2016/17) of unused personal allowance from the lower earner to the higher earner, provided neither party pays higher rate tax.
- If you earn in excess of £100,000, your tax-free personal allowance is reduced via a tapering system. In order to preserve your personal allowance, consider making qualifying pension contributions. As an employee, your employer will match your contributions up to a point and they are tax-free (from income tax and NI), again, up to a point. From 6th April 2016, the annual pensions allowance (currently £40,000) will be tapered for those earning in excess of £150,000 pa and reduced to just £10,000 for those with an income of £210,000. There is still time to review your pension contributions for the current tax year.
- In addition to the changes above, a flat rate of pensions tax relief is expected in the 2016 Budget which could impact on higher rate taxpayers. Ask your professional adviser now how this could impact on you and what options are available to you.
- Employees should consider taking salary-sacrifice options, such as pensions and childcare vouchers if they are on offer and of relevance. You accept less in salary but save more in tax, on the whole. Note that accepting a salary sacrifice option might impact on your state pension.
- Inheritance Tax is definitely an area which requires careful planning, with significant tax savings available if done properly. From 2017, a ‘new £1m’ IHT relief is being phased in, whereby a married couple can leave the family home worth up to £1m to their children tax-free. The tax planning around this should be done meticulously to ensure the full exemption applies.
- Further IHT relief applies where individuals leave at least 10% of the net value of their estate to charity – with careful tax planning the IHT rate decreases from 40% to 36%.
Many of the above tips will apply to you, particularly profit extraction, pensions and investment income.
You will also want to consider the following tips:
- Entrepreneurs’ Relief – when you come to sell your shares in a qualifying business (such as a trading company) or part/whole of a sole trader business or partnership, the amount of capital gains tax due can be as low as 10%. An experienced tax adviser can help you understand how to optimise your tax position in this respect.
- When was the last time you thought about incentivising your staff? Many successful businesses have Enterprise Management Incentive schemes by rewarding staff through share options which carry tax advantages.
- As the boss, you can decide how best to structure your company from both a commercial and tax perspective. Depending on your size and ambition, there are many options available to an entrepreneur which your accountant can advise on.
- Succession planning – you’re approaching retirement but what will happen to your business? You need an exit strategy which is tax efficient, suits your family plans and allows you to retire comfortably.