To achieve forward tax planning it is essential to work with a Lifestyle Financial Planner (LFP)
Surely, it’s natural to want to save tax on the money you or your business earns. Forward tax planning can identify the best opportunities to reduce taxable income and the tax rates that apply so that you pay less tax.
Remuneration strategies: Planning to pay less tax
Effective forward tax planning (the tax planning advice you seek will depend on your particular circumstances and how complicated your financial affairs are) is essential and the best way to reduce tax liabilities.
Working with a LFP means planning well in advance, seeking opportunities to save tax from taxable income whether you are, employed, self-employed, early business start-up right through to your eventual exit strategy/retirement. Usually this means looking at the whole financial picture, this is where your LFP can assist you greatly. They work with you to see how you can pay less tax both within the business, your personal income and in terms of potential capital gains, rental income, investment income and inheritance tax.
However, saving tax isn’t the be all and end all: it’s imperative not to get carried away. Start with your income or overall business including personal objectives, goals of life, and then seek the opportunities to pay less tax. This could be life changing if you get it right.
Save tax: key opportunities
One of the simplest way’s to save tax is to ensure you are taking full advantage of any initial tax allowances, reliefs or benefits, for most this is where the problem starts as the information is shrouded in mystery.
Income tax allowances can be set against your taxable income reducing your income tax liability. Your income tax allowances include allowable expenses which you can set against your taxable profits as well as the personal income tax allowance.
If you’re self-employed, allowable expenses can be set against your business income to reduce your taxable profits.
Allowable expenses include most business expenditure. And the cost of supplies, employees’ wages, renting premises, financing costs and so on are all normally allowable expenses. There are also special rules in a few cases, such as motoring expenses which can be claimed as allowable expenses in the normal way or using fixed mileage rates.
Expenditure which is for both business and private purposes is not an allowable expense. However, you can claim an allowable expense if you can identify what proportion of the expense is for business purposes – for example, working out what share of your home telephone bill relates to business use.
Capital expenditure on buying or improving assets such as equipment and premises is not an allowable expense either. Instead, you may be able to claim capital allowances – typically for the cost of plant and machinery. In some cases, these allow you to set the entire cost against your taxable profits in the year of purchase. Purchases of cars and higher levels of capital expenditure may need to be gradually set against tax by claiming a writing down allowance each year.
Income tax allowances
The key income tax allowance is the tax-free personal allowance. This means that no tax is charged on the first £11,000 (2016 – 17) of your total income. You may be able to claim additional allowances if you are blind, especially if you were born between 6 April 1938 and 5 April 1948, or born before 6 April 1938, or are married or in a civil partnership and at least one of you was born before 6 April 1935.
Initially new rules on taxation of dividends, came into force on 6 April 2016. The first £5000 of dividend income is now tax-free (no matter what other non-dividend income the recipient has). However, in the spring budget of 2017 the Chancellor announced that from 6 April 2018 the tax-free dividends allowance would reduce to £2000 (previously £5000).
This measure has a harsh effect on those who work with spouses in very small family companies. For example, a couple working together and splitting income of £100,000 per annum could be over £5000 per annum worse off.
Income tax reliefs
Income tax relief is provided for any pension contributions you make, up to 100% of your earned income subject to a maximum annual allowance of £40,000 (2016÷17 tax year). If you’re paying into a personal pension scheme, basic rate income tax is reclaimed by the pension provider. Higher rate taxpayers can reclaim the additional tax through their tax return.
Tax relief is also available for any losses your business makes. Depending on the circumstances, these losses can be set against other income or gains in the current year or in previous years, or carried forward to set against future taxable profits.
A few types of business with very variable profits – such as farmers and authors – can reclaim averaging relief. By averaging out profits for two years, this avoids paying high levels of tax one year and lower ones in another. This can reduce the total amount of higher rate tax payable.
If you cease trading, a special overlap relief may reduce your final tax bill. You may also be entitled to post-cessation relief for additional expenses after you stop trading – for example, if some of your taxable profits turn out to be bad debts.
A few additional personal income tax reliefs may be available to you. These include rent-a-room relief if you have a lodger in your home, and tax relief on gifts to charity. From April 2017, there will be two new allowances. It will be possible to earn up to £1000 from your property without paying tax. For example, income from renting out your driveway or garage. There will also be another £1000 allowance for income earned from occasional jobs such as selling goods or providing services.
Simple ideas to reduce tax
Your LFP can advise on what allowable expenses you can claim and what other income tax allowances and reliefs apply to your particular circumstances.
Contact MRA Business Solutions Ltd today for a no obligation, one-hour complimentary consultation. Working with clients to mentor, support and develop.
t: 01424 776214