The tax year end is around the corner, but it is not too late to consider some basic tax planning.
Most tax allowances are confined to a single tax year. If you don’t use them, you lose them. And there are loads of tax allowances to think about. Your personal allowance, dividend allowance, trading allowance, personal savings allowance, annual exemption (for capital gains), annual allowance for pensions, the ISA allowance. The list goes on.
This might sound simplistic, but you have to make sure there is income to use these allowances. It is not hard to imagine a scenario where a company shareholder-director has had a tough year with COVID. They have been juggling issues and trying their best to keep their business afloat. They are too busy to think about basic tax matters. Equally, their accountant has had similar COVID issues, struggling with staffing shortages and working remotely. Perhaps they have taken the eye off the ball with tax planning and making sure all their clients’ needs have been considered. The shareholder-director has been paying himself cash as and when he needed it, but since there have not actually been any dividends formally declared, these payments will instead be treated as loans from the business. If there are no dividends declared before the year end, this could result in the director having no personal income to disclose on their tax return. That is £14,570 tax-free income lost due to not doing basic planning.
(A quick point here – back-dating dividends is very dangerous territory and something HMRC do not view positively. Be very weary if your accountant is offering this as a simple fix.)
There might be more nuanced tax plans to exploit certain scenarios. Some of my clients have made loans to their companies. In this case, we can charge the company interest on those loans. This interest income is taxable on the individual but will normally be covered by the personal savings allowance (£1,000 for basic rate taxpayers, £500 for higher rate taxpayers). There is some extra reporting to HMRC, and tax should be withheld at source, but this usually results in a saving for the client.
The timing your income payments could be useful. Perhaps you are considering renovating your house in the summer, which will require extracting an extra £20,000 from the company. Your current regular income from the company is £90,000. If you paid that in one lump sum in the summer your income in that tax year will exceed £100,000 and you will lose some of your personal allowance. Instead, you could pay £10,000 before the end of this tax year and £10,000 in the summer and maintain the personal allowance in both tax years.
This year the timing of dividends or employment bonuses will be especially important since the planned tax increase of 1.25% is still set to go ahead in April 2022 (despite the cost-of-living crisis we are facing). If you have sufficient profits available now, a bonus paid prior to 6 April 2022 might save you taxes in the long run.
Also, the timing of expenditure might be crucial. Say your income was about to sneak over £100,000, where you start losing your personal allowance, or over £50,000, where you start losing child benefits. If this is trading income, accelerating capital expenditure might help bring those profits back down. Alternatively, you could potentially make a Gift Aid payment earlier than planned (to that mate you keep promising you will donate to) or make a pension payment (as long as you are happy that that cash will not be seen again until you retire). Both these approaches can reduce your net income.
These are just some simple examples. There are plenty of other ways to plan and save tax. Also, the most complicated your tax affairs are, for example if you have international tax affairs, the more consideration will be required at the year end. But as I say, you still have time to speak to your accountant and/or financial advisor to make sure they have considered all the angles.
These are general examples and not formal advice. Each taxpayer is different; therefore, we recommend that you consider your options carefully with an expert before taking any actions.
If you want to discuss any of the above, or any other matter, just give us a call on 020 7183 3383 or email info@kma-spotlight.com.
