We are rapidly approaching the end of the tax year, so if you are a higher rate tax payer or have a business or company with a year-end coming up, now is the time to act.
There are a number of things you can do to reduce your tax bill.
Dividends
From 6 April 2016, the rate of tax on dividends is changing and this is likely to have the biggest impact on small, owner-managed companies who tend to draw a small salary with the balance of their income as dividends.
The first £5,000 of dividends received will be tax-free.
Then basic rate taxpayers will pay 7.5% on their dividends.
Higher rate taxpayers will pay 32.5% on their dividends.
Additional rate taxpayers will pay 38.1% on their dividends.
For companies that structure their affairs to withdraw the “ideal” amount to avoid any personal tax, it will now cost around £2,200 per annum in personal tax. This will also put a lot of people into the payments on account regime for personal tax, which will have cash flow implications too. Payments on account for personal tax will need to be made every 6 months.
So, if you have the available profits within your company, it would be a good idea to pay yourself an extra dividend before 5 April, particularly if you haven’t utilised your full basic rate tax band.
Capital Expenditure
Expenditure on “plant and equipment” for your business/company qualifies for 100% tax relief in the year of purchase up to an annual spend of £200k. This includes tools/equipment, vans, computer equipment, bikes and many other assets (but excluding cars). So if you spend £20,000 on a new van, it will reduce your corporation tax bill by £4,000.
As an unincorporated business or sole trader, the saving could be higher depending on your prevailing rate of tax. Make sure these large purchases are made before your business or company year-end to get the full cash flow benefit of the tax savings.
Pension Contributions
It is highly likely that the tax savings on pension contributions will be attacked in the budget next month.
If you are a higher or additional rate tax payer and have surplus cash then it seems that now has never been a better time to make an additional pension contribution and get tax relief at 40% or 45%.
It is expected that not only will the rate of tax relief be reduced but that the annual contribution limits will be slashed too.
As a limited company, pension contributions can be made subject to the annual limits. They must also be seen as a reasonable amount in view of the Director’s/employee’s remuneration package to qualify for corporation tax relief.
There is no expectation that the rate of tax relief on pension contributions made by a company will change.
Other Expenditure
If your business is likely to incur any other costs, such as staff bonuses, make sure these costs are incurred before the year-end to make sure you benefit from the tax savings sooner rather than later.