Paying tax is, infamously, one of the two certainties in life. With the UK tax system growing ever more complex, and the onus for paying the right tax being placed squarely on the individual, it’s never been more important to get the best possible professional advice on your tax position. With the right advice, you’re ready for the end of the financial year, and can be confident you’re maximising your tax planning.
Having the right tax planning in place can help you to significantly reduce your tax liabilities and plan your tax spending across the course of the year.
The tax advice you’ll need will depend on your own specific circumstances and the complexity of your financial situation. But we’ve highlighted details of the most important areas of tax planning that you should be considering prior to 5 April 2016 and the run-up to the financial year-end for 2015/16.
Being charitable can be good for you too
If your income goes over the £150,000 mark, you’ll be taxed at the higher 45% income tax rate. And, due to the personal allowance being reduced by £1 for every £2 of net income over £100,000, for income between £100,001 and £121,200 the effective top rate is actually 60%.
If your income is near to these thresholds, you could potentially reduce your tax liability by reducing your taxable income below £100k or £150k. And one way to do this is to change your income into a non-taxable form, such as giving income yielding assets to a spouse, deferring your income, making contributions into a pension scheme or giving substantial payments to charity.
The benefit of non-cash payments
It’s commonplace for employers to offer employees the option to exchange a cash payment for approved share options, benefits in kind or contributions to their pension in lieu of salary.
If you take this approach, and exchange income in return for a tax-free pension contribution – for example, to take you below the £100k threshold – you’ll save on both the income tax due and the National Insurance contributions (NIC) paid.
Changes to the taxation of dividend income
The taxation of taxable dividend income – for example, from shares that aren’t held in an Individual Savings Account (ISA) or pension fund – is changing.
From 6 April 2016, the effective tax rate will increase by up to 6% for some taxpayers. But this is balanced by the introduction of a new £5,000 nil rate band on dividend income, so the precise amount you pay on your dividend income will depend on the amount you receive and your income in 2016/17
Do you receive a significant amount of dividend income from your own or a family company? If you do, it may be advisable to bring forward any dividends into the 2015/16 tax year. Caution is required, though. If you’re normally a basic-rate taxpayer, receiving a large dividend payment could push your total income into the higher income tax bracket or result in a loss of your personal allowances – which would be counter-productive to your end aim.
On the flipside of this, if you receive relatively low levels of taxable dividend income, it may be beneficial to defer your dividends until 2016/17 – in this way, you’d benefit from the new dividend nil-rate band. Talking to a professional adviser is the most sensible way to identify the option that’s most appropriate for you.
Rearranging any substantial investments
It’s possible that you may have substantial investments outside an ISA or other tax-efficient wrapper.
If so, you should think about rearranging them. One option is to rearrange these investments so they produce a tax-free return. The other option is to arrange your investment as a return of capital, meaning it will be taxed at a maximum of only 28% (rather than income taxable at a maximum of 45%).
Company cars tax
The taxable benefits on company cars are effectively being increased each year due to an annual reduction in the level of CO2 emissions that trigger each 1% increase in benefit. For example, in 2015/16, a car with emissions of 150g/km triggers a 25% taxable benefit. But the same vehicle will produce benefits of 27% in 2016/17 and 29% in 2017/18.
Bearing this in mind, it could be worthwhile to use your own car for business travel and to claim a tax-free mileage allowance from your employer. If fuel’s been provided for private use, think about whether full reimbursement of the cost to the company would be a more cost-effective option than paying the fuel-scale charge, which is based on the vehicle’s CO2 emissions.
Contact us today to discuss your situation.