Year End Tax Planning

“Avoiding large tax bills so more of your money stays in your pocket”

Another year, another blog, another tax advisor telling you to prepare for the end of the tax year. As the end of the current tax year approaches, there is an incomprehensible amount of articles online about saving as much tax as possible; ranging from the over complicated, to the legally questionable. The answer? Careful tax planning based on your circumstances and you as an individual. There is no one-size-fits-all answer when it comes to tax planning, however in this quick blog post I will go over a few key areas.

DIRECTORS:

If you are a director of a company, you have the option to take dividends provided your company has sufficient reserves. Dividends are taxed at a very low rate of just 7.5% in the basic rate band, making them a fantastic option to reduce your tax bill. In the current tax year, you can take £2,000 of dividends tax free! Don’t get too caught up thinking about tax savings however. You do not pay any national insurance on dividends, meaning you won’t earn state pension credits from a purely dividend income. In the 2018/19 tax year, you can take a salary of £8,424 which qualifies you for a state pension, but you won’t actually pay any national insurance – the best of both worlds!

CAPITAL GAINS:

Are you disposing of an asset? You may need to consider whether you have a capital gains tax liability. Right now you have an annual exemption of £11,700 – meaning any total gains less than this amount aren’t taxable. This is a ‘use it or lose it’ exemption, so careful planning of when you dispose of certain assets can mean a greatly reduced tax bill.

PENSIONS AND GIFT AID:

If you are a higher rate tax payer, the easiest way to save on tax and plan for your future is to make personal pension contributions. Pension contributions extend your basic rate band, meaning you pay more tax at a lower rate – saving you 20% on your higher rate income. Provided you are not already drawing a pension, you can put up to £40,000 into your pension each year. Gift aid works in a similar way, it increases the basic rate band. However, you can be taxed on your donations if your income tax is lower than 20% of the donations you’ve made.

INHERITANCE TAX

Inheritance Tax (IHT) can be charged at 40% on your estate and on gifts you’ve made. There are IHT reliefs available, but it’s important that you use them. Each year you can make gifts of up to £3,000, which are exempt from IHT. If you haven’t used your previous year’s allowance, you can also claim it. Gifts on marriage are also exempt up to certain limits and small amounts under £250 at any time are not counted. Normal expenditure out of income can also be exempt and are a great long term IHT mitigation tool.

The IHT nil rate band has again been frozen at £325,000. However, 2018/19 marks the second year of the new residence nil rate band (RNRB) which relates specifically to your main residence being passed down the generations. For 2018/19 this band is worth £125,000 taking the total relief available to £450,000.

Although not directly related to year-end planning, now is a good time to review your will to ensure it meets your wishes and takes into outcount the ongoing changes.

If you want to know more about tax planning, and what would be best for you, please get in touch with a member of our tax team.

Chris Willis CTA

Senior Tax Consultant