Looking for smart ways to pay less tax should be seen as a critical part of your tax planning, both on behalf of your personal finances and the finances of your business.
Though some may feel that doing all you legally can to keep your tax bill as low as possible isn’t something they would wish to be associated with, the truth is you’re already paying for these reliefs and allowances to be used by others.
Regardless of how you feel about them, these reliefs, allowances, and exemptions are here to stay.
The only question is – are you going to use them, or be used by them?
1) Maximise Your Personal Allowances
One of the simplest things you can do to pay less tax is make sure both you and your spouse are maximising your tax-free personal allowances, which for the current tax year (2015-16) is £10,600 if you were born before 5 April 1948, or up to £10,660 if you were born before this time and have a maximum income of £27,700 (if your income is above this level, your personal allowance will be reduced by £1.00 for every £2.00 of extra income until it becomes the same as the basic personal allowance).
You can maximise these allowances further by transferring income between you and your spouse or partner. In these circumstances make sure you’re fully aware of the rules surrounding income shifting.
2) Open an ISA
Make sure that both you and your partner use the full Individual Savings Account (ISA) allowance before making further investments, as interest earned on ISA’s is tax free.
In the current tax year (2015-16) you may place up to £15,240 into an ISA. Thanks to last year’s announcement that cash and investment (share) ISAs are now interchangeable, your annual ISA investment can now be in the form of just cash, just stocks and shares, or any combination of the two.
Remember that you need to invest before 5 April 2016 to maximise your tax-free ISA allowance for this tax year.
3) Invest In a Pension Scheme
When you invest into a company or personal pension scheme you will receive tax relief up to a certain allowance. Currently that allowance is set at £40,000.
You may take advantage of unused allowances for up to three years, so if you’ve not payed into a company or personal pension scheme in the last two years, and you have the means to do so, you may invest £120,000 in this tax year.
4) Take Advantage of the Tax-Free Childcare Scheme
Announced by the Prime Minister and Deputy Prime Minister back in March 2014, the Tax-Free Childcare Scheme is a scheme designed to help millions of working parents across the United Kingdom tackle rising childcare costs.
The new scheme is available to nearly two million households up and down the country for all children up to aged twelve, and children with disabilities up to aged seventeen, provided parents are in work, earning over an average of £50.00 a week (and under £150,000 per year).
If you’ve previously been receiving childcare vouchers, fear not. The Government aren’t making the switch to the Tax-Free Childcare Scheme mandatory; they’ve provided a better off calculator so you can find out which scheme you’d save the most money under.
5) Look Into Your Business Structure
Structuring your business tax-efficiently in the early years can make all the difference with regards to whether or not your company will still be around a year or two from now.
When starting out, it’s often a good idea to operate as a sole trader or partnership so to avoid having to pay corporation tax. As a sole trader or partnership you’ll pay only income tax and national insurance, so long as you don’t expect your earnings to exceed £81,000 per year. If this becomes the case, you will have to register for VAT.
6) Make the Most of Your Annual Investment Allowance (AIA)
There hasn’t been a better time in recent years to look into your capital expenditure to see where you can maximise your claims for capital allowances.
On 1 January 2013 the government increased the maximum amount a business can deduct from its taxable profits via the Annual Investment Allowance from £25,000 to a staggering £250,000 for a temporary two year period. Then, to stimulate investment further, on 19 March 2015 the AIA was increased to £500,000 and extended to 31 December 2015.
7) Use Your Capital Gains Tax (CGT) Exemption Limit
Making the best use of your CGT exemption limit is essential to consider when selling an asset. To make full use of your CGT exemption limit (£11,100 for 2015-16) you may consider transferring assets to your spouse or partner, or placing them in joint names before an impending sale.
If you are to receive a particularly large gain, you could consider spreading this release over tax years so to make full use of your tax exemption limit, so long as by doing so you’re not putting your full capital gain at risk.
8) Invest in EIS/SEIS Schemes
The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) offer a tax efficient structure that encourages individuals such as yourself to invest in small businesses (and in the case of the SEIS, small start-up businesses) in return for significant tax savings and reliefs.
If you choose to invest in the EIS you may receive up to 30% tax relief on income tax as well as capital gains tax, and inheritance tax. If you choose to invest in the SEIS, you have the prospect of receiving up to 50% tax relief in the tax year the investment is made, regardless of your marginal rate.
9) Use Your Inheritance Tax (IHT) Exemptions
If you’re in a position in which you’re able to give away cash and assets as gifts, make sure you take note of the following rules surrounding IHT exemptions so you don’t have to pay tax on these gifts through your estate:
- You may give away up to £3,000 per year in cash or assets, tax free, and you may carry over any unused part of your exemption until the following year.
- In addition, you may give small gifts up to a value of £250 to as many people as you wish per year, and every gift will be tax exempt. If a gift exceeds £250, the entire exemption is lost.
- Wedding and civil partnership gifts may be given in the form of cash or gifts up to £5,000 for parents, £2,500 for grandparents, and £1,000 from anybody else – all tax exempt.
Keep in mind that the value of any gifts given within seven years of death will be added to your estate, and any tax due will be paid out from it. Inheritance Tax is currently 40% on gifts, however if gifts were given between three and seven years prior to death and the total value is over the threshold, there is tax relief available on a sliding scale up to 80%.
10) Keep Your Will Up-To-Date
No single document is more crucial after your passing than your Will – yet many of us never get around to writing ours, and if we do, we rarely update it.
Put simply, your Will can ensure that the wealth and assets you’ve built up over the course of your life are automatically transferred to the people you want to have ownership of them after your death. It is worth noting that although Wills don’t go out of date, your circumstances may have changed since the original was drafted. It is highly advisable to review and update your Will regularly to ensure it correctly reflects your family and financial circumstances and makes the most of any tax structuring available.
Improve Your Tax Planning to Pay Less Tax
To speak with a professional to discuss your tax planning efforts, contact us today on 020 8780 2349 or get in touch with us via our contact page to see how we can save you money as you pay less tax.
This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.