Tax Year-End Action Plan: Our Top Ten Tips
As the 2019/20 tax year-end approaches, there are many things that you can do to help improve your tax bill. There are some actions you need to take before 5th April and some that you need to leave until later. Read on to learn what our top ten suggestions are to save you money.
Take a holiday to save tax
Will working the next few weeks take your income into higher tax rates for this tax year? Or will it take your rolling turnover beyond the VAT threshold? If so, then it may be sensible to take a break this side of the tax year-end. Once over a certain income level you could be penalised for earning more.
For example, if your income is between £50,000 and £60,000, and you claim Child Benefit, it is claimed back through the High Income Child Benefit Charge. You or your partner will pay back 1% of the benefit for each £100 earned over £50,000. If either of you earn £60,000, the benefit is fully repaid by a tax charge on the higher earner.
Also, you may want to take a holiday if your earnings will take you over £100,000. Your personal allowance of £12,500 is reduced on a sliding scale when your adjusted net income goes over this limit. For every £2 over £100,000 you earn, you will lose £1 of personal allowance.
Consider making additional pension contributions or gift aid contributions to reduce the impact of higher income or profits.
Pensions are a great way of saving tax. If you put your money inside a pension wrapper, it is not subject to tax. Income and capital growth are tax-free within a registered scheme, while contributions can attract tax relief.
Contributions attract tax relief in different ways, depending on whether it is the individual or a business making the contribution. An individual may contribution into their pension scheme up to the level of their relevant earnings in the tax year. If there are no relevant earnings, they may contribute up to £3,600, subject to both annual and lifetime contribution limits.
Higher earners receiving more than £150,000 must be careful, as the amount you can save into a pension is tapered. If your income is at this level, you should be seeking advice from an independent financial advisor.
As part of a remuneration package, an employer can make any level of contribution into an employee’s scheme. Although, this is subject to annual and lifetime contribution limits.
Making Tax Digital (MTD) for VAT
Businesses which trade over the VAT threshold are already required by law to register for MTD. Therefore, if you now exceed the VAT registration threshold you will also need to register and apply MTD for VAT to submit your VAT returns and avoid penalties. All digital links must be in place by April 2020.
You must consider your turnover on a 12-month rolling basis to check whether you have exceeded the threshold. A common mistake is to think that the turnover ‘resets’ to zero at the end of your accounts period or the end of the tax year. So, at the end of any month, check what the previous 12 month’s cumulative turnover has been. If you are not sure exactly what your turnover is at any point in time, get professional advice now!
If you are a sole trader or partnership, your Annual Investment Allowance limit resets on 6 April 2020. So, if you have significant expenditure planned, you can maximise your allowance either by bringing it forward or delaying it until after 5th April. If you are expecting to have to replace major assets, you should seek advice on the best time to purchase and claim the Annual Investment Allowance.
Also, there is a new structures and buildings allowance that allows you to claim tax relief. It permits you to claim 2% on qualifying commercial property construction costs.
Company owners: Are you paying yourself in the most tax-efficient way?
Consider whether you are able to legitimately pay a spouse or family member. The deadline for paying someone in the 2019/20 tax year is 5 April 2020.
If your business has made a profit and you have not paid any dividends, do so. The first £2,000 is tax-free. However, if you have paid dividends, ensure that dividend paperwork is up to date. This ensures that your tax bill cannot be challenged by HMRC.
If you are not using your savings allowance consider charging your company interest at a market rate for any balances that it owes you.
Loans to participators (Directors loans)
Review the director loan accounts from your close company and consider repaying an overdrawn balance. Otherwise tax will be payable on outstanding balances. Outstanding loan accounts can also lead to a National Insurance liability.
The loan charge
If you had loans from Employee Benefit Trusts or contractor loans from a trust after 9 December 2010, you must report them under the new loan charge rules.
If you haven’t, then you have until 30 September 2020 to declare your loans and pay the tax. If not, you will face interest and penalties (unless you are already within the settlement process with HMRC).
Research &Development relief & patent box
Consider whether you have undertaken any qualifying R&D spend for which R&D relief claims may be made. Also consider any income from patents which is covered by the patent box regime.
Employment issues & IR35
Are you are running a personal service company? Currently, your company may not be caught within IR35 but may fall foul of the private sector off-payroll working rules from 6 April 2020. If so, then claim expenses this side of 6 April as you may not obtain tax relief in 2020/21.
In addition, the 5% tax-free IR35 allowance will be removed if you are working in the private sector. These new rules will apply from 6 April.
Even small companies can be affected if your end client is medium or large. The changes can lead to a dramatic drop in your take-home pay. Take action and get professional advice.
Companies year-end tax planning
There are so many things to think about, so it’s important to tax plan throughout your accounting year. If you want to be tax efficient, talk to us about our Year-end (shareholder) tax review and planner.
Income Tax over £100,000:
Pension Tax Relief:
Making Tax Digital:
Tax on dividends:
Business Tax Planning:
Personal Tax Planning: