Year-end tax planning is not a straightforward matter. What needs to be done will depend upon individual circumstances and the business structure.
This article is general guidance and it is necessary to speak to advisors to ensure that the proposed changes are appropriate for your specific circumstances.
Because many of the allowances and reliefs offered by the tax system are lost if not used each year, now is the time to make sure your tax affairs are up to date. Be careful though: some reliefs can create problems if not used correctly, and in some cases trying to save tax can actually cost you money.
Whether you're a business owner, or an individual, it would be very wise to set some time aside do this, as a review can help you understand what opportunities, if any, may be available to you and your family. After all, the UK tax system is enormous and also very complicated. This being the case we would recommend talking to a tax advisor to help you to avoid the common pitfalls, explore any opportunities and maximise potential savings, where possible.
Personal allowance
The annual income tax personal allowance for 2023/24 is £12,570. If you have family members with less income than this, consider possible ways to utilise their allowance – family businesses can pay dividends or salaries (so long as actual work is performed) and trusts can distribute income to beneficiaries, for example.
£1 of the personal allowance is lost for each £2 of taxable income received above £100,000. This creates an effective marginal tax rate of 60% on income between £100,000 and £125,140. Managing the timing of income between tax years, where possible, can also help – the tax payable on income of £100,000 one year and £150,000 the next is less than the tax on income of £125,000 a year for two years.
A similar tax trap applies for individuals subject to the high income child benefit charge (HICBC): where a household has received child benefit and adjusted income of a relevant person exceeds £50,000, it is clawed back proportionately, with the effect that, in a band of income between £50,000 and £60,000, every £1 of income is taxed at effective rates exceeding 50%.
Marriage allowance
Up to £1,260, 10% of the personal allowance, can be transferred to the spouse/civil partner where one party to the marriage/civil partnership is a basic rate taxpayer, and the other has income below the personal allowance. The reduction in the tax liability for the basic rate taxpayer is up to £252 in the current year.
Reducing taxable income
There are significant advantages in reducing taxable income. It may prevent the top slice of income from falling into the top tax bands. Also, the personal allowance is reduced by £1 for every £2 of net income over £100,000.
Taxable income can be reduced by moving investments into non-taxable investments, contributing into a pension, or giving to a charity. Where possible, income can also be deferred into another tax year or assets that give income can be given to a spouse or civil partner that incurs a lower tax charge. Trading losses from self-employment income can be set off against other income earned in the same year. Losses in the first four years of the business can be carried back up to three tax years.
Reducing income (through increased pension payments, charitable donations, or other measures) is also beneficial to retaining Child Benefits. Child Benefits are clawed back at 1% of the benefit for every £100 of income over £50,000. If both parents keep their income below £50,000, the Child Benefit will not be clawed back.
Pensions
Pension contributions made by an employer are tax efficient as there is no tax to pay, provided the annual allowance is not exceeded. This can be very tax efficient where the company is owned by the person receiving the benefit. In other cases, it is often beneficial to all parties for employees to sacrifice some salary in exchange for a pension contribution made by the employer. This reduces NICs, though this is not always so tax-efficient for high earners. For individuals earning more than £200,000, employer’s pension contributions are added back. Tax relief on contributions is restricted where gross income exceeds £260,000.
The rules for tax relief on pension contributions can be complex and advice needs to be taken to ensure that pension annual allowances tax relief is not clawed back. The standard annual allowance for pensions is £60,000 plus any unused relief brought forward from the prior three years. There are two tests for calculating the annual allowance available (and the position is further complicated in Scotland and the claim for relief may need to be made through the tax return). However, if the adjusted income exceeds £260,000, the individual’s annual allowance is reduced by £1 for every £2 in excess of that amount (a minimum £10,000 allowance remains available).
Stakeholder pensions are available to all UK residents and there can be benefits to making contributions to children’s pension schemes.
Funds invested in a pension grow free from tax. The limit on the total amount that can be held has been removed so it could be advantageous to make further contributions. That being said, it is possible that the Life Time Allowance could be reintroduced. There may, therefore, be some benefit in crystallising benefits from the pension pot now.
Once a person reaches 55, the pension benefits can be drawn down from a personal pension (but it may be more difficult, depending on the rules for defined benefit schemes). The tax implications of drawing a monthly payment or a lump sum need to be considered prior to making a withdrawal.
Charitable giving
A donation using Gift Aid to a charity before 31 January can be treated as being made in the prior tax year to accelerate tax relief. There may also be advantages in giving shares to the charity as it will create an income tax relief instead of triggering a Capital Gains Tax liability.
Charitable donations qualify for tax relief by extending the donor’s basic rate tax band. The mechanics can be confusing, but the net effect is that if a 40% taxpayer makes a cash donation of £100, the charity receives £125, and the individual can personally claim back tax of £25.
There are some traps to watch out for when making charitable gifts. If you make a donation under Gift Aid and have not paid sufficient tax to match it, your tax liability will actually increase - a Gift Aid payment of £100 by a non-taxpayer will make them liable to pay tax of £25. Not all donations qualify for tax relief either. For example, a gift to a US charity will not be allowable, but a gift to a UK charity created to support the US charity would be. Make sure that you check that your payment is going to the right entity or else both you and the charity will miss out on tax relief.
Inheritance tax (IHT)
Taxpayers have a £3,000 annual gift exemption, which can be carried forward one year. This means that you can make gifts of up to £6,000 every other year without suffering inheritance tax if you do not survive the gift by seven years.
If your income is greater than your living expenses, you may also be able to make larger gifts that will not be taxed regardless of when you die. To qualify, these must form a regular pattern of giving and should be properly documented. You should take professional advice before proceeding with such a strategy.
Easy Inheritance tax reliefs
You and your family can take advantage of a number of IHT free reliefs.
An annual gift of £3,000. This provides parents (and grandparents) with an opportunity to make tax-efficient gifts.
Small gifts of £250 per person as many as you care to make per tax year. This provides the opportunity of gifting £250 to each child or grandchild each and every tax year.
Regular gifts from disposable income. This is a complex area and people can and do get it wrong, so it is worth seeking advice. When thought through and implemented correctly it is a valuable relief.
Tax-efficient investments
There are a number of tax-efficient investments. Some of these permit the investment to be carried back to previous years to accelerate tax relief. For example, up to 100% of investments into a qualifying EIS company can be carried back to the previous year. A maximum investment of £1 million is permitted (£2 million if invested in one or more qualifying knowledge-intensive companies). Tax relief is available at 30% and can be carried back a tax year.
Additionally, 50% income tax relief can be claimed on up to £200,000 in start-up companies. This can also be carried back to previous years.
EIS and SEIS allowances
Tax relief is given for qualifying investments in certain trading companies under the enterprise investment scheme (EIS) and seed enterprise investment scheme (SEIS) rules, where the company has obtained approval from HMRC. Income tax relief at 30% (EIS) and 50% (SEIS) on the amount invested can be attractive, as well as exemption from capital gains tax on disposal and the possibility to roll over (EIS) or partially exempt (SEIS) capital gains on other assets reinvested into such investments.
Watch out when making these investments though. To qualify for the capital gains tax exemption, you must have claimed income tax relief on the EIS or SEIS investment. For example, if you make an EIS investment in a year when you have no income tax liability, the gain made on disposal of that investment will be taxable.
Tax-efficient investments
ISAs are a tax-efficient way to save for higher rate taxpayers. The maximum allowance is £20,000.
Choice of owner of businesses
Where one spouse or civil partner has a lower tax rate than the other spouse or partner, it makes sense to ensure that business income is in the name of the person that has the lower tax rate. This is particularly important for property income as interest relief is restricted to the basic rate.
Dividend tax rates
Dividend tax rates are lower than the main income tax rates. There is a nil rate band for the first £1000 of dividends (£500 from 2024/25). Above this allowance tax is charged at 8.75% on dividend income up to the basic rate band limit, 33.75% on income above the basic rate limit to the higher rate band limit and 39.35% above that.
There are other ways of extracting value from a company, such as taking capital repayments on loans made to the company, payment of bonuses may be tax efficient or increasing the pension contributions the company makes on your behalf.
Capital gains tax
Where possible, obtaining a capital payment can be tax efficient. Capital Gains Tax is subject to 20% (or 28% for disposals of carried interests or residential property that is not a principal private residence), which is lower than most personal tax rates.
The 2023/24 Capital Gains Tax (CGT) annual exemption is £6,000. Disposing of investments standing at a gain to utilise this amount may save tax of up to 20% (28% for chargeable residential property). A £1,200 tax saving is good but may not be worth the economic risk if you want to hold the investment long-term. For example, if shares are sold and bought back within 30 days, you will be treated for CGT under the shares matching rules, so if prices go up in the period between selling and reacquiring, you could miss out on growth in value that exceeds the tax saved.
As a result of buying the same share within 30 days of last sale, share matching rules mean that you will need to re calculate the capital gain on the disposal. Instead of using the share price on the date of the disposal the shares are matched with the newly purchased shares.
The UK tax system actively encourages taxpayers to plan and act each year to use the available reliefs and allowances. Doing so can create substantial savings but care is required to make sure that your actions do not backfire, creating larger tax liabilities than they save.
Company car choice
Choosing a lower-emissions car reduces the tax cost. A new electric car with emissions of 1–50g/km and a range of more than 130 miles has a taxable benefit of 2%. But, if the range is under 30 miles, the benefit increases to 14%. Petrol and diesel cars are taxed at even higher rates.
A car that is not being used will still be taxed unless it can be shown to not be available for use. The easiest way of doing this is to hand the keys back to the employer. It may be more tax-effective to cease using a company car and claim for mileage when using your own car for business travel. Currently, the tax-free mileage allowance that can be claimed is 45 pence per business mile for the first 10,000 miles and 25 pence for mileage in excess of 10,000 miles.
Capital Allowances
It is always important to review expenditure, which may qualify for Capital Allowances Relief. Alongside plant and machinery, this includes research and development, patents, specific intellectual property and buildings and renovating business premises in specific areas, amongst other items.
There are strict deadlines for claiming capital allowances. Capital Allowances can offer very generous tax allowances of up to 100%, which can result in significant tax savings and these should be considered carefully.
Full expensing
Full expensing is available to companies subject to Corporation Tax. If your capital expenditure in your company is greater than £1m, then an allowance can be applied whereby you can deduct from your taxable profits 100% of the qualifying expenditure in the year that expenditure took place.
Basis period
For 2024/25, the tax year basis of assessment will be used when taxing profits. The 2023/24 tax year is a transitional year. This change is being introduced to align trading income with non-trading income. This change will impact businesses and it is necessary to look at the cash flow impacts and funding requirements, whether the accounting year should be changed and how internal systems will be impacted. It is advisable to start planning for this immediately.
Business Asset Disposal Relief
If you have sold a business, or you're selling a business asset, then Business Asset Disposal Relief (BADR) may apply. Where this is the case, CGT is charged at 10% on any gains you make from the qualifying business assets. This is particularly significant for higher-rate tax payers as the CGT liability could be halved from 20% to 10%.
BADR is subject to a lifetime limit of £1m per person and applies to a sale for businesses trading as Sole trader, Partnership, Limited company, Joint venture and Trust
If you own a business then you should review your BADR position regularly, the rules are sophisticated and it is easy to deviate away from them. You will therefore need to plan carefully prior to any sale to ensure you are fully compliant with the legislation. It may also be worth considering transferring shares between spouses, or civil partners, if you're in a family business.
The tax implications of becoming an investment company
If as your business scales you achieve cash surpluses, you may look to invest through your company in things such as land, property, and other assets. These investments could generate a decent return over time. If you're doing this however, you need to review the value of these assets and their contribution to your company's overall value.
If they make up 20% or more of your company's overall value then HMRC deem this as having a 'significant' impact. This means you're likely to then no longer qualify for:
Business asset disposal relief
Enterprise Investment Scheme shares
The Enterprise Management Incentive share scheme for employees
Corporation Tax
The main rate of Corporation Tax is 25% for some businesses. If your profits are greater than £250,000 then you will be subject to 25% rate. Businesses with taxable profits less than £50,000 will be taxed at the current 19%.
To note, if these thresholds are shared between associated companies, then they could be lower dependent on how many associated companies you have.
If your profits are between £50,000 and £250,000 then a tapered rate will be applied. The tax rate increases from 19% to 25% depending on the amount of profit, the main rate is reduced by marginal relief. If your company is accounting for deferred tax, you may need to factor in the increased rate in your deferred tax calculations for your year-end accounts.
Other matters
There are many other ways of reducing tax, but often these may not be attractive to most taxpayers. These include moving overseas to a low tax environment, letting a room in your home, utilising tax benefits of furnished holiday lets and incorporating let properties so that interest deductions are not restricted (although the Stamp Duty Land Tax (SDLT) costs may be prohibitive).
Tax planning can be complex. We would always recommend that you seek professional advice when undertaking a review to ensure all changes are processed and managed effectively.
We hope that you find this guide useful, but please bear in mind that this only provides a summary of the options you should be considering and not all options will be suitable for everyone.
This guide is for general information only and does not substitute specific advice. You should not rely on it as specific advice and Peria & Co cannot accept any liability for its contents. If you need guidance please contact us at info@peria.co.uk or call us on +44 (0)1932 849023.