What should you do to ensure that you are prepared ahead of the Tax Year-End?
We are currently 25 days until Year-End. In this article, tax consultant, Lewis Surtees, will discuss the two main points that you should be considering when making certain that your tax affairs are in order, ahead of the year-end which is soon approaching.
What should you be doing?
Maximising your tax allowances One way of making sure your tax exposure is minimised is by using your available tax allowances. If you don’t take advantage of them prior to the year-end, then they are lost – it is not possible to carry over many tax allowances from one year to the next.
If you are a shareholder or director of a company, look to take advantage of your 0% tax allowances.
Every person has a personal tax allowance of £12,570 along with a dividend allowance of £2,000 which are taxable at 0%. In addition to this, the basic rate band of £35,700 is taxable at only 8.75% if taken as dividends, meaning a shareholder can receive just over £50,000 and only pay around £2,700 personal tax. Even if you don’t require funds in that year, it’s still advisable to declare the dividend for the full amount. This is because this will build up the loan account meaning a shareholder can draw down tax-free in the future.
It is worth noting that as of 6th April 2023 the tax-free allowance for dividend income (the dividend allowance) will be reduced from £2000 to £1000, and then as of 6th April 2024 it will be further reduced to £500.
Previously dividend allowance was £5000 and has remained at £2000 for the last 5 years, with it being further reduced from now until 2024, which means more people will be liable to pay tax. This would mainly hit those who have investment income held outside an ISA.
These low tax rates are also available to other family members, so those with a Family Wellbeing Trust will be able to use this to take advantage of the allowances available to other family members, but make sure you take appropriate advice in order to ensure distributions are processed correctly.
Pension contributionsIt is important that you use old carried-forward allowances before they are lost after the tax year-end. The current annual allowance for pension contributions is up to £40000, depending on other income received, and unused contribution allowances can be carried forward for the last three tax years.
If you exceed the annual allowance in a particular tax year, you won’t get tax relief on any contributions you paid that exceed the limit in that tax year, and you will be faced with an annual allowance charge.
Capital gains Bringing capital gains forward into this tax year to use £12300 AEA (Annual exempt amount). From the tax year 2023-24 the AEA will be reducing to £6000, and further reducing to £3,000 from the tax year 2024-25. Simply bringing forward a capital gain to the current tax year could therefore reduce capital gains tax payable. Specific situations will vary, so professional advice should be taken.
Interest Allowances Another area that should be looked at is interest received on loans. A company can pay interest on loans provided by shareholders or directors so long as there is a formal loan agreement in place which charges a fair market rate of interest.
The interest is then tax-deductible for the company and goes against the corporation tax profits and it can be tax-free in the hands of the shareholder, by looking at:
- Personal savings allowance – this is a tax-free allowance for interest income that attracts a 0% tax rate. If you are a basic rate taxpayer (up to £50,270), your personal savings allowance is £1000. For higher rate taxpayers that reduces to £500. There is no personal savings allowance for additional rate taxpayers.
- Starting rate for savings – this gives tax-free interest income up to £5000, as long as other income is less than £17,570. The key to this is that this other income does not include dividend income. So, in a typical scenario, a director may be taking a small salary that is significantly lower than the £17,570 threshold for other income.
Once these two allowances are combined, directors could have a savings income of up to £6,000 with a 0% rate of tax for them and tax-deductible for their company – a win-win!
So, if you are a director and you haven’t already set up loan agreements, consider putting these in place so that you can charge interest on your directors’ loan account. Interest is usually then declared on an annual or quarterly basis and will be included in your income for that year.
Tax affairs are complicated and we would always advise you to speak with your advisers before making any changes. For more information on how we can help you and your business please contact us at firstname.lastname@example.org or call 02476673160.
Please note: This article is provided for information only and was correct as at time of writing (09/03/23). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance. No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.
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