By Carl Elsby, MD at Elsby & Co
As a chartered accountant, I see first-hand the significant financial impact that effective tax planning can have – and how confusing tax can be for both individuals and businesses. However, with the new tax year less than a month away, it’s essential to understand what allowances are available and what changes 6th April will bring.
Tax planning is an essential part of any business strategy and should include a review of and strategy for key issues such as managing income levels, making tax efficient investments, maximising allowances and minimising Capital Gains Tax.
Managing your income
If your earnings exceed £100k, you will lose your personal allowance on a £1 for £2 basis, essentially paying an extra 20% tax on the top of the 40% rate. This means that it’s worth considering ways to reduce any ‘earnings’ to below the £100k limit, such as making pension contributions.
Maximising child benefit: if one partner’s income is in excess of £50k, you start to lose entitlement to child benefit. Ways of avoiding this include making a salary sacrifice, making pension contributions, or if you have your own business, making your spouse a partner.
Salary sacrifice schemes: in essence, this allows you to exchange salary for a benefit, which in turn saves on employees’ national insurance contributions. Benefits could include child care vouchers, a cycle to work scheme or a company car, which is now a very viable option if it comes as a low emissions model.
Gifting assets: if held in your sole name, gifting assets to your spouse has significant tax benefits, especially for higher rate tax payers who have a spouse paying basic rate tax.
In summary, rearrange income generating assets where possible to those which bring a return on capital. This could facilitate a switch from a 45% top rate income tax to 28% Capital Gains Tax.
Tax efficient investments
Pensions: at present, you can invest a maximum of £50k in the 2013/14 tax year. However, this limit will fall to a £40k threshold as of 6th April 2014. The limit applies to all your registered pension plans and includes all pension savings made by you, your employer or a third party on your behalf. However, you can also take advantage of the pension carry forward rules which would enable you to utilise any unused allowances from the previous three tax years.
ISAs: savers can currently subscribe up to £11,520 in an individual savings account (ISA). Up to £5,760 can be in a cash ISA, whilst a maximum of £3,720 can be invested in a junior ISA by parents and grandparents up to 6th April 2014. This applies to children under 18 without a Child Trust Fund.
Venture Capital Trusts: if you subscribe to shares in a VCT, you can obtain income tax relief at 30% subject to a £200k investment limit.
Enterprise Investment Scheme: investments in qualifying trading companies can obtain income tax relief at 30% up to a £1m investment limit as well as CGT relief.
Seed Enterprise Investment Scheme: income tax relief can be given equal to 50% of the amount invested.
Maximising your allowances
No one wants to pay more tax than they have to, so ensure that you are fully utilising your allowances. Under the current rules, an individual is entitled to an income of £9,440 in 2013/14 before paying any income tax. If you or a member of your family hasn’t used up their individual personal allowance, there may be scope to manage income levels to make the most of these allowances.
Capital Gains Tax: assets and shares can be sold to use the CGT annual exemption allowance of £10,900 per person. In addition, if you have any worthless shares, you could consider a negligible value claim to establish a capital loss. In some situations, it’s possible that this could be set off against your income.
Inheritance tax: often an emotive and much resented tax, it’s helpful to know that £3k can be gifted each year. Furthermore, any unused allowance from the previous year can be used – but for one year only. It may also be worth setting up regular gift payments from your income to minimise the IHT payable on your estate.
Minimising tax and maximising wealth is an important part of maintaining personal and commercial cash flow. Furthermore, regulations, thresholds and benefits change from year to year, meaning that your tax planning strategy will need to be regularly reviewed. Ultimately, a qualified financial professional is best placed to provide the accurate, up-to-date advice that you need to make the most of any tax exemptions and benefits available to you.