With the end of the tax year (5 April) fast approaching, taxpayers are well advised to consider whether any action can be taken before the year end to optimise their tax position.
Some of the more common points to bear in mind are as follows.
1. Salary for spouse
Where one spouse (which for the purposes of this article includes civil partners) is very active in a business and the other is not, then if the less active spouse has their personal allowance available, thought should be given to whether a small salary to this spouse can be justified.
It is important the amount received is commensurate with the work undertaken and, if so, this can provide a tax-deductible expense to the business equal to the salary while no personal tax liability arises for the spouse.
2. State pension credit
In addition, where a salary is set between Lower Earnings Limit for NIC purposes of £6,240 per annum and the Primary Threshold of £9,568 per annum this can provide a credit for state pension purposes with certain other benefits without costing anything in terms of tax or NIC.
This is a rare case of ‘getting something for nothing’ from the tax man and can be useful where the individual has not built up a full entitlement to the state pension.
3. Minimising tax on savings income
Where two spouses have differing income levels e.g. one is a higher rate taxpayer and one has non-savings income within the personal allowance (currently £12,570), thought should be given to transferring interest bearing investments to the lower earner.
Such a transfer can be carried out free of capital gains tax (as it is between spouses) and can give the lower earner access to the £5,000 starting rate for savings in which a 0% tax rate applies.
There is a separate ‘personal savings allowance’ of up to £1,000 which can also be used to minimise the joint overall tax liability of the spouses. Tax savings can be made if one spouse is a higher rate taxpayer and the lower earning spouse is not. Again by transferring interest-bearing assets to the lower earner, tax savings can be made.
The possibility of making pension contributions should not be overlooked and remains very tax efficient. Care should be taken to remain within the statutory limits (annual and lifetime allowances). This is a complex area but if used correctly pension contributions can result in tax relief being given at the marginal rate which, for 40% or 45% taxpayers, can be considerable.
Where a taxpayer runs their business through a company, it should be remembered that dividends are not treated as ‘relevant earnings’ for pension purposes. However, assuming various conditions are met, it can be possible for their company to make these contributions as ’employer’ and receive tax relief for them.
Therefore, an enhanced employer pension contribution may be considered instead of a dividend.
5. Tax-efficient investments
There are very generous tax reliefs for certain investments into Enterprise Investment Scheme (EIS) company shares, Seed Enterprise Investment Scheme (SEIS) shares and Venture Capital Trusts (VCT).
The rules are complex and there are strict investment limits but on qualifying investments income tax relief of 30% of the investment may be available on EIS and VCT investments and as much as 50% for SEIS investments.
There are also various generous capital gains tax reliefs for these investments.
6. Dividend allowance and timing of payment
The first £2,000 pounds of dividends paid in a tax year is tax free. This should not be forgotten for those taxpayers who own their own company of which they are a director and therefore have discretion over the voting of dividend payments.
It is also worth noting that tax on a dividend paid before 5 April 2022 will be payable (where applicable) on 31 January 2023, one year earlier than if the dividend was paid just after 5 April 2022. Therefore, from a tax perspective there can be cash flow advantages to postponing dividends even by a day.
Dividend tax rates are increasing by 1.25% after 5 April 2022. Depending on individual circumstances, there may be an incentive to bringing forward dividend payments into the current tax year, notwithstanding the earlier tax payment date.
7. Capital gains tax annual exemption
Where a taxpayer owns capital assets (such as quoted shares) standing at a gain and has their annual capital gains tax exemption of £12,300 available, thought should be given to realising gains within this limit.
Given assets can be transferred between spouses tax-free this effectively gives an annual joint tax-free capital gains allowance of £24,600 for married couples.
If, for instance, a married couple held a portfolio of quoted shares they should liaise with their investment advisor to ensure the annual exemption is utilised each year where possible.
8. Inheritance tax reliefs
Each person has a £3,000 annual exemption. This means a gift up to this amount can be made without inheritance tax consequence.
It is possible to bring forward an unused allowance for one year. Therefore, if a married couple have not made any gifts either in the year ended 5 April 2021 or currently in the year ending 5 April 2022, jointly they can make gifts of up to £12,000 under this relief.
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