With the end of the 2018/19 tax year fast approaching, now is a good time to review your finances to ensure you are making full use of the available allowances and minimising your tax liability.
Maximising the personal allowance
The basic income tax personal allowance (PA) for an individual is set at £11,850 for 2018/19 (although this allowance is restricted where an individual’s adjusted net income exceeds £100,000). In order to make the most of allowances across the family, if one spouse has little or no income it may be worth transferring income to them. However, it is important to bear in mind the settlements legislation relating to income shifting, and to ensure that any transfer is an outright gift.
Considering the Marriage Allowance
The Marriage Allowance may benefit some married couples where one spouse earns less than the PA and the other spouse is not a higher or additional rate taxpayer. For 2018/19, up to £1,190 can be transferred to the lower earner, helping to reduce a couple’s overall tax liability by up to £238.
Making the most of tax-free savings
The annual ISA allowance means that you can save up to £20,000 tax-free for 2018/19. There are a variety of different types of ISA to choose from.
Increasing contributions into your pension scheme will also provide tax relief – this is restricted to the higher of £3,600, or the amount of UK relevant earnings. Additionally, contributions in excess of the annual allowance of £40,000 will generally be taxable.
All payments must be made before 6 April 2019.
Utilising capital allowances
Most businesses can claim an Annual Investment Allowance (AIA) on expenditure on most types of plant and machinery (except cars). In the 2018 Autumn Budget, Chancellor Philip Hammond announced an increase in the AIA from £200,000 to £1 million, applying to expenditure incurred from 1 January 2019 to 31 December 2020. Complex calculations may apply to accounting periods which straddle these dates. Please contact us for advice on making the most of the AIA.
The Dividend Allowance reduced to £2,000 in April 2018, so the question of whether it is better to take a salary/bonus or a dividend requires consideration. Dividends are taken after corporation tax has been calculated, while a salary is taken before corporation tax is deducted.
On the other hand, national insurance is due on any salary taken, which can be up to 25.8% in combined employer and employee contributions.
Other ways to extract profit from your business might include considering incorporation if your business is currently unincorporated, and making the most of tax-free allowances, such as mileage payments.
For more year end planning tips, please contact us.
Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.