Ten top tips for reducing your tax bill
May 2013
Sensible tax planning is an essential tool in making the most of your finances and helping your business's profitability.
Keeping your tax bill to a minimum is not a matter of aggressive or complex tax schemes, but rather of identifying which of the many tax reliefs and allowances specifically granted by law are available to you.
From ISAs to capital allowances, here are ten top ways of saving tax - for you, your family and your business. Contact us to discuss how we can help you take advantage of them.
1. Maximise personal allowances...
Ensure that you are making the most of the tax-free personal allowance (PA), which for 2013/14 is £9,440 for those aged under 65, or the age-related allowances which are worth up to £10,660, maximum income £26,100. If your spouse or partner has little or no income, consider transferring income (or income-producing assets) to them to ensure that they are able to make full use of their PA.
Care should be taken to avoid falling foul of the settlements legislation governing 'income shifting'. Any transfer must be an outright gift with 'no strings attached'. One useful planning situation can arise where there is a transfer into joint names as tenants in common. In these circumstances, giving your spouse as little as 1% interest can mean that 50% of the income is automatically shifted for tax purposes. Please contact us before taking action.
2. Pay into a pension scheme
Investing in a company or personal pension scheme will afford tax breaks on your personal pension contributions. For 'additional rate' taxpayers, maximising pension contributions (within limits - see below) during 2013/14 will allow you to obtain relief at the rate of 45%. Pension contributions can be made at up to 100% of relevant earnings, subject to the annual allowance of £50,000, and unused allowances may be carried forward for up to three years.
3. Use your capital gains tax (CGT) allowance
Make the most of your CGT exemption limit each year (£10,900 in 2013/14). It may be possible to transfer assets to a spouse or civil partner or hold them in joint names prior to any sale to make full use of exemptions. Individuals with a particularly large gain may want to realise it gradually to take full advantage of more than one tax year's allowance. However, you should only consider spreading a disposal of, for example, shares if you will not be putting your gain at risk in the meantime.
4. Invest in an ISA
Up to £11,520 can be invested in an ISA this tax year, of which up to £5,760 can be invested in cash. Most income accrues tax-free, although the tax credit on UK dividend income cannot be recovered. All investments held in ISAs are free of CGT. And don't forget, the new JISA, for those aged under 18 who do not have a Child Trust Fund account, allows investment of up to £3,720 in 2013/14. 16-17 year olds can also invest up to £5,760 in an adult cash ISA, even if they already have a JISA.
5. Review your business structure
The structure of your business can have a significant impact on your annual tax bills. While in the early years of a business it may be advisable to operate as a sole trader or partnership, as profits increase it may be more beneficial to form a limited company or put in place a hybrid structure (e.g. have a limited company as a partner). Please talk to us about the best option for your business.
6. Go for green transport
Switching to a 'green' company car with low CO2 emissions can reduce your tax liability, as such vehicles are taxed at a lower percentage rate. For cars which do not produce CO2 engine emissions under any circumstances when driven ('zero emission cars', including those powered solely by electricity), the emissions-based percentage reduces to zero thereby reducing the car benefit charge to nil.
7. Review your capital expenditure
Review your capital expenditure to maximise claims for capital allowances. For a temporary two-year period from 1 January 2013, the majority of businesses are able to claim a 100% Annual Investment Allowance (AIA) on the first £250,000 of expenditure on most types of plant and machinery (except cars).
8. Rent out a room
Under the 'rent a room' scheme, income from letting furnished rooms in your main residence is exempt from tax if the gross annual rent does not exceed £4,250 (£2,125 if you share the income). If you are letting to lodgers who live as part of the family, there will be no loss of capital gains exemption. Otherwise, there may be some restriction.
A lodger can occupy a single room or an entire floor of your home. However, the scheme doesn't apply if your home is converted into separate flats that you rent out, or if you let unfurnished accommodation in your home.
9. Write a Will and keep it up-to-date
A well-drafted Will can ensure that the wealth you have built up during your lifetime benefits the right people on your death - and it can also be structured to save tax. However, you must review it regularly to ensure it reflects changes in family and financial circumstances as well as changes in tax law.
We can help to reduce your tax liability and secure your family's long-term financial future, through a tax-efficient Will. Please contact us for further assistance.
10. Utilise inheritance tax (IHT) exemptions
You should make the best use of IHT allowances, including the annual exemption, which allows you to give away cash or assets up to a total value of £3,000 a year without incurring any taxes. Any regular gifts you make out of your after-tax income, not including your capital, are also exempt from IHT (providing you have enough income left after making the gifts to maintain your normal lifestyle).
Most gifts made during your lifetime will be entirely exempt from IHT if you live for seven years after making the gift. These sorts of gifts are known as 'Potentially Exempt Transfers' (PETs).
Taxable gifts made up to seven years before death are added back into your estate and tax is calculated on the inclusive value. But to the extent that such lifetime gifts made between three and seven years before death exceed the tax threshold, the associated tax is discounted by up to 80%.
Don't forget, small gifts of up to £250 a person per tax year are exempt, while parents can each give cash or gifts worth up to £5,000 to their children as a wedding/civil partnership gift (grandparents and great grandparents can give up to £2,500 and others can give up to £1,000).
For advice on these and other tax-saving ideas, please contact us.