Tactics for tax planning
The tax system can be really confusing! To help you avoid any nasty surprises, we have put together some top tips on minimising your tax liability, in your personal life and business.
Although every situation varies, through smart investments, sharing personal allowances and using legitimate tax-efficient vehicles, you can keep your tax payments low and within the legal framework, giving you more money to play with.
1. Claim your Personal Allowance - if you work for a business or are self-employed any income below the threshold of £11,500 is not taxed. It’s always worth checking your tax code at the start of each tax year to ensure you’re on the right one.
2. Use your Marriage Allowance - spouses and registered civil partners earning less than the Personal Allowance can transfer £1,150 if your husband, wife or civil partner earns more than you (their income must be between £11,000 and £45,000). Likewise, you may also benefit from transferring income-producing investment assets to a spouse or civil partner that pays tax at a lower rate.
3. Give through Gift Aid - making donations to charity through Gift Aid can reduce your taxable income. If you are in the higher tax bracket (above £33,500), this is especially useful as you can claim back the difference between the basic and higher rate of income tax on any Gift Aid donations.
4. Claim tax deductible expenses - if self-employed, you can claim expenses against your tax bill, including travel, accommodation, the costs of running a car and utilities if working from a dedicated business premises and even a proportion of costs, such as lighting, heating, cleaning, insurance, mortgage interest, council tax, water rates and general maintenance if working from home. Business owners and landlords can claim up to £200,000 annually for capital expenditure, such as computers, plant equipment or tools, using the Annual Investment Allowance.
5. Pay into a pension -private pension contributions including workplace, personal and stakeholder are tax-free up to certain limits. Tax is normally only payable if your contributions exceed 100% of your annual earnings or if your savings go over the £40,000 Annual Allowance and the current £1-million Lifetime Allowance limit. Saving beyond these limits could result in HMRC reclaiming the tax relief paid out. When you draw your pension upon retirement, you can usually take up to 25% of the amount built up in any pension pot as a tax-free lump sum.
6. Tax perks on personal savings - if you’re a basic rate taxpayer, you can receive £1,000 of interest a year tax-free. The limit for higher rate taxpayers is £500.
7. Explore tax-favourable investments - You can invest up to £20,000 per person in an Individual Savings Account (ISA). When you sell shares or units held in an ISA, you don’t pay Capital Gains Tax. And if you want to avoid being taxed on gifts made to your children, pay into a Junior ISA or Children’s Bonus Bonds.
8. Utilise your Capital Gains Tax annual exemption - currently £11,300 (£5,650 for Trusts). This is a tax on profits made when selling shares or investment funds outside of a pension or ISA or on possessions over £6,000, such as jewelry, antiques, that second home. Married couples and civil partners who own assets jointly can claim a double allowance of £22,600. Certain gains are exempt from CGT, for example, gifts between husband and wife or registered civil partners, the sale of your main home or the sale of a car.
9. Plan for another drop in the tax-free Dividend Allowance - small business owners, company directors and people earning dividends through shareholdings received another blow in the spring Budget 2017. Having halved the tax-free Dividend Allowance from £10,000 in 2014/15 to the current £5,000, from 2018/19 all dividends over £2,000 will be taxed, regardless of income. Dividends over the allowance are taxed at 7.5% for basic rate, 32.5% for higher rate and 38.1% for additional rate taxpayers.
10. Death and taxes - when you die, inheritance tax (IHT) is payable on your estate- ie the money or possessions you leave behind. It also applies to some gifts you might have made during your lifetime, although there is a long list of tax-free exemptions . Under annual exemption rules you can give away £3,000 worth of gifts each tax year (special rules apply to married couples and civil partners) and if you give away more than £325,000 in the seven years before your death, your recipients will be charged IHT.
There are also a number of other tax breaks available, from renting a room to a lodger to earning tax-free extra income from an occasional job. It’s important to understand what personal and business taxes you are liable for, and what you’re not.
If financial worries are keeping you awake at night, we can help. Use our online tools for a free and quick financial health check to see where you’re at financially. And if you need extra support, our Lemonade Heroes can help you get your finances on track.