One good way to focus on tax savings this year is to ensure you have a tax plan. Unless you specifically plan to save it is very unlikely to happen.
And in addition, you are likely to pay more tax than necessary. This applies to both business and personal tax.
Avoid retrospective tax planning and aggressive tax schemes – Jonathan Amponsah CTA FCCA, The Tax Guys explains here that there might be are areas you or your accountant have neglected. Despite what you may have heard, there are still plenty of legitimate ways to save tax and sleep well at night.
Let’s look at some areas where tax can often be saved so that you can see if they are likely to apply to your situation:
Save Income Tax by Using A Property Company
If you’re a landlord with a portfolio of properties in your name, you’re likely to be paying more tax via the self-assessment system because of the recent changes in property tax and, notably, the mortgage interest restriction. Companies are not affected by the mortgage interest restriction and they do pay lower rates of tax. However please do seek specialist tax advice because there are some tax traps to beware of before of proceed.
Engage specialist tax advisers
Most business owners naturally turn to their accountants for all things tax. Accountancy and tax are two different professions, although there are many similarities.
However savvy entrepreneurs normally have both an accountant and a tax adviser. Because they know that accountants are like your GP, who is good and knows all the general rules, but tax advisers are like your surgeons, who are specialists in their field and know the exceptions to the rules. So whilst an accountant will rightly tell you that entertainment is not tax deductible, a tax adviser will usually lift the rocks and find you some exceptions to the general rule that allows you to claim the entertainment.
Use £78,000 tax allowances first
At the heart of every sensible tax planning is the use and leverage of the tax-free allowances HMRC give us. Make the most of these allowances first as they get wasted if not used. And don’t forget about the allowances of your spouse and children. Did you know that if you add up the income tax allowance, capital gains tax allowance, savings allowance and dividends allowance, you get a whopping £26,000 plus allowances in the year? That’s just for starters. And if you have a spouse or a child who are not using their allowances, then that’s a potential tax-free income of £78,000 (26,000 x 3).
Intelligently claim expenses including holidays and school fees
If you have a limited company, did you know that you can claim things like school fees, golf lessons and holidays though your company and save money? Yes you can and HMRC allows you to do this through the benefit in kind system.
Claim This £4,800 Tax Savings
No one likes to talk about death. But it’s a reality. And very often people pay unnecessary inheritance tax by not claiming the right reliefs.
Gifts of up to £3,000 per year can be made free of Inheritance Tax. Unlike most of the tax allowances, the limit increases to £6,000 if the previous year’s annual exemption was not used. So you get to use last year’s allowance of £3,000. A married couple can therefore make Inheritance Tax exempt gifts including cash totalling £12,000 per tax year.
This simple planning can save a possible tax bill of £4,800 in the event of your demise.
Embrace tax efficient pensions
Do think long term and make use of tax efficient retirement planning. So instead of merely contributing to a pension scheme (which you get tax relief for, by the way) and leaving the funds in there, why not consider vehicles like SSAS or SIPPS to help you leverage the funds and get a second bite of the tax cherry. These pension schemes, subject to certain rules, are then used to buy, say, a commercial property and the rental income gets additional tax benefits.
Reward staff tax efficiently
When it comes to rewarding staff, consider approved share schemes and staff suggestion awards to encourage your staff to get involved and to reward them tax efficiently.
There are two kinds of staff awards:
- encouragement awards – for good suggestions, or to reward your employees for special effort
- financial benefit awards – for suggestions that will save or make your business money
Encouragement awards are tax free up to £25. But financial benefit awards are exempt up to £5,000. That’s right £5,000.
But before you go ahead and pay your staff tax free income, please note that as with all tax reliefs and tax exemptions, there are conditions to meet. Speak to your tax adviser first.
The other tax efficient reward schemes are the various share option schemes including EMI (Enterprise Management Incentive). Why is this tax efficient? Because when staff sell their shares, they pay 10% tax instead of 20, 30 or 40% if they meet the strict conditions. But again please beware that these rules come with strings attached and always seek advice.
Preserve Business Property Relief
A common, and expensive, mistake I see among many business owners is lack of planning around how their businesses should be passed-on tax free when they are not here. The rules, subject to some conditions, allows your life’s work to be enjoyed tax free by your loved ones. But if you do not have a Will or if in your Will you have passed the business to say your spouse, you are wasting this generous tax relief.
These are some areas where you may be able to make tax saving and reduce your business or personal tax bills. To be sure you make the right decisions, as with all tax matters, do speak to a tax adviser and ensure you have the best tax plan for this year that you can.
ABOUT THE AUTHOR
Jonathan Amponsah CTA FCCA is an award winning chartered tax adviser and accountant who advises business owners on entrepreneurial tax reliefs. Jonathan is the founder and CEO of The Tax Guys.