No one wants to pay more tax than they are required to and yet every year hundreds of thousands of taxpayers miss out on opportunities to reduce their tax bill.
With many people experiencing a squeeze on living standards as the cost of living begins to bite, there has never been a better time to plan for tax.
So, what savings can be made? Our expert team have outlined some of these below to make tax planning pure and simple for you and your business.
Dividend Tax and Remuneration
Businesses and their owners need to consider their current position regarding the following before year-end:
- Dividend taxation – Have you utilised the zero per cent Dividend Tax Band of £2,000?
- Capital Gains Tax – Have you used your annual exemption for 2022-23 of £12,300?
- Business Asset Disposal Relief – Formerly known as Entrepreneur’s Relief, the lifetime limit for qualifying gains has been reduced from £10 million to £1 million.
- Salaries – Consider payment of salaries to owner-managers at tax-efficient levels
Personal Tax Planning
Inter-spouse transfers –For individuals, whose annual income is between £100,001 and £125,000 this is an ideal way of reducing your tax liabilities.
Exchange your salary for benefits – Consider exchanging part of your salary for payments into an approved share scheme or additional pension contributions, to take you below the £100,000 threshold.
Dividends and bonuses – Pay these early, so that they fall into the current tax year.
Directors’ Loans – Have you used the tax-free interest amount on any loans to your business? Depending on your income level, you could save up to £1,000.
Inheritance tax
When tax planning, you also need to make sure you have plans in place for the future, especially if you are among the growing number of people to be affected by inheritance tax.
Here are some steps you can take:
- Charitable gifting – If you leave at least 10 per cent of your net estate to charity a reduced rate of 36 per cent rather than 40 per cent applies and could save your family money.
- Annual gift allowance – You can give away a total of £3,000 worth of gifts, per person each tax year without them being added to the value of your estate. The is allowance can be carried over two years if it is unused.
- Gifts out of income – You can also make regular gifts out of your income which are tax-free if they are used for normal expenditure, which could include paying for a grandchild’s school fees.
- Passing on your pension – You should revisit your current plans and update your Will to ensure that your family receives the full benefit of any remaining pension fund.
- Trusts – There have been several changes to the treatment of trust funds recently which are complex and could affect some people. Your accountant will guide you.
Pensions and Tax
No one wants to see their hard-earned pension targeted by the taxman, so you should consider the following:
- Protecting your pension – The Lifetime Allowance (LTA) has changed considerably in recent years and currently stands at £1,073,100 for 2022/23. It has been frozen at this level until the 2025/26 tax year.
- Annual pension allowance –You can invest up to £40,000 a year into a pension tax-free. This amount can be carried over three years, allowing you to use unused allowance to top up your pension.
- Stakeholder pension – All UK residents including children can make annual net contributions of £2,880 per year (£3,600 gross) regardless of whether they have any earnings.
- Pension drawdown – If you are 55 or over, you may be able to start drawing down pension benefits now from a personal pension such as a SIPP, even if you are still working.
Pension contributions for directors
Directors of limited companies can contribute pre-taxed company income into their pension pot. As an employer contribution, it counts as a business expense which makes the company eligible for tax relief against corporation tax, which could allow you to save up 25 per cent in corporation tax.
Not only does it allow directors to save for retirement, but it is also a tax-efficient way to use business profits.
Take note that there is a limit to how much you can pay into a pension and still receive tax relief. The limit currently stands at £40,000 or 100 per cent of your income, whichever is lower.
Employers don’t have to pay National Insurance on pension contributions, so by contributing directly into a pension rather than paying it as a salary, you can save on these contributions.
Tax-Efficient Investments
There is a wide range of tax-efficient investment options, which can help to reduce your liabilities.
Are you using, or have you considered the following?
- ISAs – including Help to Buy ISAs, Lifetime ISAs (LISA), Stocks and Shares ISAs and Child ISAs
- Share Schemes
- EIS and SEIS
- Venture Capital Trust investment
- Community investments
- Social Enterprise investments
- Life Assurance bonds
- Offshore bonds
To keep your affairs in order and minimise your tax bill, get in touch with our expert team today at Pure Cloud Accounting today. We make being in business pure and simple.
