Some New Year resolutions are made to be broken, but ensuring you are paying the least amount of tax, while carefully adhering to the rules, should be one resolution you ensure you stick to throughout 2018 and the years that follow.
With only a few months left until the end of the financial year, now is an important time to ensure all your affairs are in order to make the most of everything you are entitled to.
Here are some proactive steps to help improve your tax position in 2018.
With the 31 January deadline looming, if you haven’t yet handed in your records for your tax return to be prepared, this should be number one on your to do list. As should the resolution to ensure that next years records are provided much earlier. This is not only to keep your accountant sane but also has benefits to you, the taxpayer, as it allows your accountant or tax adviser more time and the opportunity to consider tax planning options for you which could trigger savings.
You would know much sooner the amount of your liability which in turn allows you to budget accordingly with no nasty surprises in January.
If you get your return filed before 31 July and your tax liability has reduced your July payment on account can be reduced, saving you money.
- Personal allowances
If your income for 2017/2018 is between £100,000 and £123,000 your personal allowance will be phased out, resulting in an effective tax rate of up to 60% within this income bracket. Taxable income can be reduced through pension contributions or charitable donations to ensure this punitive tax bracket is avoided.
- Marriage allowance
One of the most under-claimed of all tax reliefs is the marriage allowance, which was introduced in 2015 and can save couples up to £230 in the current tax year. Where one spouse or civil partner has no taxable income, this relief allows the transfer of up to 10% of their personal allowance to their partner if he or she pays tax at the basic rate. Some couples may be able to claim it for the three tax years since it was introduced, saving £662.
- Savings and dividend income
Couples may benefit from redistributing savings accounts or shareholdings between them to maximise their personal savings allowance and dividends allowance. The personal savings allowance, which was introduced in 2016, is a nil rate band for savings income of £1,000 for basic rate tax payers and £500 for higher rate taxpayers, with no allowance for additional rate taxpayers. Anyone with a credit balance on their director’s loan account may consider charging interest on the loan to use the tax free allowance.
The dividend allowance is £5,000 per person allowing dividends up to this amount to be received tax free. However this will reduce to £2,000 per person in April so it is essential to ensure everyone’s allowances are used this year, this will be particularly relevant for family companies.
- Capital Gains Tax (CGT)
Everyone has a CGT annual exemption of £11,300 rising to £11,700 in April. This relief can be very valuable but if it is not used in a tax year it is lost forever. As transfers of assets between spouses and civil partners are tax free it can be beneficial to transfer assets into joint names prior to a sale to utilise both annual exemptions. However if a sale is not imminent, you can also utilise your annual exemption by drip feeding assets into a trust each year. This method is beneficial with properties and can be used to uplift the base cost each year so that an eventual sale effectively uses all the annual exemptions throughout the ownership not just that in the year of sale.
- Inheritance Tax (IHT)
Individuals can make gifts of up to £3,000 a year and these gifts will be immediately exempt from IHT; no seven year waiting period applies. This allowance can be carried forward but for one year only. So if you haven’t made any gifts in 2016/2017 or 2017/2018 you have until April to make gifts up to £6,000 saving IHT of up to £2,400.
The residence nil rate band was introduced last year and will increase this April to £125,000 per person. This relief is an exemption from IHT when your home passes to a child or grandchild. The relief can have a significant impact on your IHT liability however as it is withdrawn for estates exceeding the £2 million threshold, careful planning may be required regarding the structure of your Will to ensure you qualify.
From April the tax relief on mortgage interest for let properties will be restricted further with many taxpayers seeing their tax bills take another leap upwards. Now is a good time to review your portfolio with a professional adviser who can clarify your options for you. One solution might be to sell a property to reduce the borrowings on others; another solution might be to incorporate the business but whichever direction you choose there are tax implications which need careful consideration.
- Review your business structure
From time to time it is worth reviewing your business structure to ensure it is the most tax efficient for your personal circumstances. The start of a new year is a great motivation to embark on such a review. As always it comes down to number crunching as different profit levels give different optimal structures. It may be beneficial to move from being self-employed to operating through a company. While some people are initially put off by the perceived administrative burden of operating through a company, with the right accountant and advice, this can be very straight forward to run while creating substantial tax savings.
- Your internal accounting systems
While the external structure of your business is important, so too are the internal functions and a new year’s resolution could be to review your internal accounting systems. At David Allen we have specialists in Sage, Xero and QuickBooks accounting software who will ensure you have the right systems in place and provide support and advice while in operation.
Some of the above may appear common sense but there could also be some great opportunities to ensure your finances flourish in 2018.
So make this year count, talk to your accountant and don’t let your resolutions get thrown out with the wilted Christmas tree.
Posted: December 31st, 2017