As we progress through the first quarter of the new tax year, we consider the various tax savings options available to you as an individual and for your small business to keep your profitable and enjoy good cash flow management.
Read on for our Tax Planning Guide for Small Businesses.
First up are pension contributions. As an individual you are entitled up to £40,000 annual pension allowance per year, tax free. Furthermore, any unused annual pension allowance not used in the last three years can be carried forward to the current year.
However, if your salary is £150,000 or above there is a tapering off of the pension tax relief, with a reduction of £1 for every additional £2 income earned relating to all income earned from £150,000 to £210,000. For those earning above this upper limit of £210,000, their annual tax allowance will be reduced to £10,000.
Any UK domiciled individual under the age of 75 can pay into a pension by setting up a personal stakeholder pension, which allows for low and flexible pension contributions and often with pre-set investment strategies to suit your risk appetite.
The amount you can contribute tax free in a given tax year is up to £2,880 (net) into a stakeholder pension, and this is tax free to all UK domiciled individuals whatever their earnings and even if you are unemployed. The incentive to save for your retirement whatever your circumstances therefore begins with this initial tax free saving sum.
How this works in practice is that the pension provider you opt for will claim back the tax directly with HMRC, and the stakeholder pension holder will have an immediate uplift taking their pension pot to £3,600, after the 20% tax relief is applied on the £2,880 tax-free contribution.
Please note that pension funds cannot be accessed by anyone until the age of 55.
As you may already be aware, charitable donations by individuals and limited companies are tax free. As a UK taxpayer, you can claim back any tax you pay for any charitable donations you make, irrelevant of whether you are a basic, higher or additional rate tax payer.
You can claim back tax as an individual through your Self-Assessment Tax Return (SA) or if you are making a charitable donation through a limited company, you would do so via the company’s tax return. It is important therefore to make a record of any charitable donations you make to ensure you can claim the tax paid. The donor of the charitable funds will also benefit from the tax relief claim if you tick the ‘gift-aid’ box that you will have seen, and as a result they can claim the basic rate of tax on the donation of 20%, and so topping up the overall charitable donation.
An example of how this works: if a higher rate tax payer who is taxed at a rate of 45% donates £20,000 to a charity of their choice, the charity receiving the funds can claim 20% tax on the donation from HMRC directly, so an additional £5,000 would top up the donation and as the charitable giver, you would also be able to claim back tax relief via your personal SA.
Any donations you make via your salary, the gift aid and claiming of tax is completed at source and you are not required to complete a personal SA. It is only those donations made outwith your salary and/or pension which should be included on a personal SA.
A basic rate tax payer has an annual entitlement of tax free savings on the first £1,000 interest received on those savings. A higher rate tax payer will earn up to £500 tax free interest on their savings in a given tax year.
If you are a director of a limited company, you can also set-up interest loans to your company to take full advantage of the tax relief.
Individual Savings Accounts (ISAs)
Saving tax free via an ISA is a common method and one the most well known tax reliefs by individuals. As at the current 2019/20 year, the level of tax free savings in an ISA is £20,000.
We suggest you shop around for the ISA that works for you as there are various options available to you such as ISAs with different investment strategies and levels of risk in share option ISAs as well cash ISAs where you can access the cash at any time or after a prolonged period, which tends to afford higher interest rates.
ISAs are available to all UK residents over the age of 18 or if you opt for a cash ISA, you can access these aged 16 or over.
For those looking to save for younger children, there are Junior ISAs on the market which have a lower annual tax free limit of £4,368. Ordinarily, if a parent gifts their child a sum of £100 or more the tax implications are on the parent, but with a Junior ISA in place, this is not applicable.
If you are looking to gift assets to family ahead of your death rather than leaving all gifting of assets in your will, you can do so tax free with an annual inheritance tax allowance of £3,000 per year for an individual. You can also utilise the previous tax year’s annual exemption if unused allowing you potentially a £6,000 tax free gifting for the current tax year.
Gifting to your partner or spouse
If you and your partner or spouse would like to benefit from a lower of rate of tax from your assets, one option is transfer your assets to make the most of any tax reliefs available. For example, if you have use your full capital gains exemption and you want to sell an asset, you can gift the asset to your partner tax free to utilise their capital gains allowance. Gifting between spouses is tax free, so you can tailor your tax planning to each of your circumstances to make the most of the tax reliefs available to you.
For an individual, the tax-free annual allowance on dividend income is £2,000. This means that if you are looking to extract funds from your profitable business in the current tax year, you can do so tax efficiently by paying yourself and any other shareholders/owners of the company a dividend payment of up to £2,000 tax free. This can also be topped up by a salary if required, please read further here on the level of income you can do so, tax free.
How can I save on tax?
Often there is a requirement for forward tax planning to take full advantage of the tax reliefs available to you and your business so you can invest your hard earned cash back into your business. We strongly recommend you speak with a tax and accounting specialist like Southside Accountants. Please contact us to see how we an accountant can help you run your business effectively.
As small business advisory accountants in London, we understand how difficult it can be to take full advantage of the benefits of a limited company structure.
Southside Accountants provide accountant services, including tax return services, to small businesses in the UK.
Written by Shaima Todd.