Over the past few weeks, we’ve been sharing three simple ways you can save tax prior to the end of the personal tax year. So far, we shared some facts that you might not know about ISAs and taken a look at how Enterprise Investment Schemes can save tax. In our final instalment, we take a look at the various annual allowances available to you and how to use them to your advantage.
Capital gains tax allowance
Everyone has a capital gains tax (CGT) allowance of £11,100 for the current tax year. However, this can’t be carried forward (use-it-or-lose-it). So it’s worth using yours each year in order to reduce your risk of incurring a significant capital gains tax bill in later years.
Any gains in excess of the allowance are taxed at 10%, if you have basic rate band available. If not, it’s taxed at 20% for higher rate taxpayers. These rates are 18% and 28% if the gain applies to residential property and carried interest, and 10% for gains qualifying for Entrepreneurs’ Relief.
Pension tax allowance
Contributing to your pension pot regularly is a good way to save for retirement, as well as a great way to save on corporation tax if you contribute from your company’s profits.
For example, if your business makes £100K profit, the tax on this would be £20K (in the current tax year). However, if you were to contribute £20K from your company’s profits into your pension pot, you will reduce your profit to £80K and the tax payable would be £16K. Therefore, saving £4K in corporation tax and investing £20K into your pension at the same time.
Everyone has an annual allowance of up to £40K and you maybe able to pay in more if you’ve not taken full advantage of this allowance in previous years. Get in touch if you’d like advice on how much you can pay into your pension scheme.
Dividend tax allowance
If you are a shareholder in a limited company, it’s really important you take the right proportion of salary vs dividends. For the tax year 2016/17, there is a tax-free dividend allowance of £5K in the year. Any dividend income above this will be taxed at 7.5%, up to a total dividend income of £32K.
It’s a good idea to review the dividends and total income you’ve taken so far this tax year, to ensure you avoid breaching any tax band thresholds. Here’s some guidance on what these are for the current tax year.
From April 2018, The tax free allowance will be reduced to £2,000. We have covered off this change and the others from the 2017 Budget.
You should be making the most of your spouse’s or civil partner’s allowances too (and perhaps even those of your children, depending on how old they are). Transfers between married couples are not treated as sales, so they are not subject to CGT. If you or your spouse have not used all of your CGT allowance in the tax year, you may want to consider transferring investments to them. There are strict conditions to this, so please get in touch with our tax team if you would like more information.
If your partner isn’t currently earning an income, could they be given a job within your business that would justify them earning the £15K allowance tax free? This would be made up of a basic salary of £8,060 and no more than £7,940 in dividends (assuming that you don’t have income from any other sources).
Please get in touch if you need any tax assistance – we love helping
If you’d like to speak to a tax expert to help you decide what you need to do to save tax prior to 5 April, please call the office on 0345 201 1580 or email firstname.lastname@example.org.