Minimising your tax liability ahead of the year end
With the end of the 2018/19 tax year rapidly approaching, now is the ideal time to ensure you are making the most of the available allowances and exemptions. Here we highlight some key areas to consider by 5 April 2019.
Making the most of capital allowances
When capital equipment, such as plant or machinery, is purchased by a business, the cost of the equipment can be offset against profits by claiming capital allowances.
Most businesses are able to claim a 100% Annual Investment Allowance (AIA) on the first portion of expenditure. Please note that special rules apply for cars and certain 'environmentally friendly' equipment. The AIA applies to businesses of any size and most business structures: however, provisions are in place to prevent multiple claims.
During the 2018 Autumn Budget, Chancellor Philip Hammond announced an increase in the AIA from its current level of £200,000 to £1 million. The increase will apply to expenditure incurred from 1 January 2019 to 31 December 2020. Accounting periods which straddle these dates will be subject to complex calculations: therefore, it is vital that purchases are timed carefully.
Making use of your ISA allowance
A range of ISAs are available to savers, including the Lifetime ISA for those under the age of 40; the Help to Buy ISA for first-time homebuyers; and the Junior ISA for individuals aged under 18.
Savers are able to invest in any combination of cash or stocks and shares, up to the overall annual subscription limit of £20,000. An individual may only pay into a maximum of one Cash ISA, one Stocks and Shares ISA, one Help to Buy ISA, one Lifetime ISA and one Innovative Finance ISA. Savers have until 5 April 2019 to make their 2018/19 investment.
Retaining more of your profit
The Dividend Allowance reduced to £2,000 in April 2018, and the question of whether it is better to take a salary/bonus or a dividend requires careful consideration. Dividends are taken after corporation tax has been paid, while a salary or bonus is generally tax deductible for the business. However, a salary or bonus can carry up to 25.8% in combined employer and employee national insurance contributions.
Other tax-efficient ways of extracting profit might include considering incorporation, or making pension contributions.
Maximising personal allowances
Individuals are entitled to their own personal allowance (PA), which is set at £11,850 for 2018/19 (rising to £12,500 for 2019/20). If your spouse or partner has little or no income, you may want to consider transferring income or income-producing assets to them. However, care is required: the legislation governing 'income shifting' states that any transfer made must be an outright gift, given with 'no strings attached', so speak to us before taking any action.
Certain married couples may also be able to make use of the Marriage Allowance, which allows those eligible to transfer up to 10% of their PA to their spouse. The Marriage Allowance is available to married couples and civil partners where one spouse has income below the PA and neither spouse pays tax at the higher or additional rate. Up to £1,190 can be transferred in 2018/19, which could help to reduce a couple's tax liability by up to £238.
The strategies outlined above detail some of the ways in which you may be able to minimise your tax liability ahead of the 5 April tax year end. We are able to advise on these and many other tax-saving initiatives – please contact us for more information.