Round-up of pre-tax-year-end tax planning tips and tricks

With the end of the current tax year fast approaching, you might be wondering what actions you can take to minimise your tax bills.

OK, so we’ve left this one a bit closer to the wire than intended, but as the end of the current tax year approaches, we wanted to set out some quick and easy tax planning tips for you to consider.

Make Pension Contributions
The annual allowance for pension contributions is now £60,000, following an increase to the previous £40,000 annual allowance in April 2023. This means that you can pay up to £60,000 per annum into a pension and receive tax relief on this. Providing you have a pension in place from the past, you can also make use of carry forward rules to mop up any unused (£40,000) allowances for the previous 3 tax years. For those operating as a limited company, this is a great way to mitigate Corporation Tax as the company can pay into a pension for you and save Corporation Tax on this, while for sole traders, partners and those on high salaries, making a personal pension contribution is a great way to mitigate higher and additional rate tax.

Pension Advice
Your company can pay for you to get some advice on your pensions without you having to declare it as a Benefit in Kind, providing it costs under £500. If you run a business and have various older pension schemes from past employers that you want to look at combining then why not get your company to pay an IFA for this advice. Our colleagues at KRW Financial Planning would be happy to assist!

Consider Charging Interest on Directors Loans
As mentioned in previous Tax Bulletins, with Corporation Tax rates now higher, if you have an amount owed to you by your company on a Directors Loan then it is well worth considering charging the company interest on your loan. This loan interest will be taxed on you, but usually only at 20%, plus for basic rate taxpayers you have a £1,000 personal savings allowance to offset (assuming not already utilised against other interest received), and in many cases where your only income is a personal allowance level salary and dividends, you will also have a £5,000 starting rate band taxed at 0% as well. This means that for many clients it is possible to be paid up to £6,000 in interest per annum without paying any personal tax. However, the company can offset this cost against its profit and save Corporation Tax, making this significantly more tax efficient than paying dividends. Of course, you need a credit Directors Loan balance to be able to implement this, and as a rule of thumb we tend to advise an interest rate of 7% to 10%. There is also some admin to attend to, as the company needs to deduct 20% tax from any interest it pays to you and pay this over to HMRC using form CT61, but even so this is well worth considering for those clients with a healthy Directors Loan to their company.

Reduce Corporation Tax by making your holding company ‘passive’
With the new higher Corporation Tax rates from April 2023 came the re-introduction of associated company rules, which seek to split the £50k starting rate band on which profits are still taxed at the old Corporation Tax rate of 19%, between associated companies. If you have a group then your holding company will usually be an associated company, but if all it does is receive and pay out dividends, but is otherwise inactive, then it is usually possible to eliminate it from the associated company calculation, by ensuring that the dividends paid into and out of the holding company in the year are equal. This then gives your trading company more of the £50k starting rate band to use, reducing its Corporation Tax bill.

Electric Cars
OK, you might struggle to implement this one before 5th of April! But electric cars remain highly tax efficient for company owners. Many of our clients use part of the funds they withdraw from their companies in salary and dividends to make finance payments on a personally owned car. But with the Benefit in Kind rate still only 2% of list price for electric cars, why not buy an electric car through your company so that your salary and dividends go further. With the higher rate tax threshold frozen at £50,270 for a few years now, while inflation has pushed up the cost of living, we find that many of our clients are now struggling to keep under the higher rate tax threshold. Where that applies, finding things that your company can pay for instead of you, without big tax bills, is well worth considering, and buying an electric car through the company is a great example. There is also a 100% first year capital allowance for the purchase of brand new zero emission (i.e., fully electric) cars which gives a nice front loaded Corporation Tax saving too. This applies whether you buy outright, on hire purchase, or on a PCP. Hybrids are also worth looking at, particularly those with a high electric only range, for which the Benefit in Kind rate can be as low as 5%.

Trivial Benefits
Did you know that you can buy vouchers for your staff with a value of up to £50 without any tax for them to pay on them? This also applies to Directors, although limited to 6 times a year. This means that your company can buy you up to 6 gifts or vouchers every year, each valued at up to £50, and your company saves Corporation Tax on the cost, with no personal tax for you to pay. Care is needed to spread these out over the year (buying 6 x £50 vouchers in one go will not qualify!), but every little helps!

Use Your ISA Allowance
Each tax year you can invest up to £20,000 into an ISA, which offers some key tax benefits compared to other savings and investments. First of all, any interest earned on an ISA is tax-free and doesn’t need to be entered on your Self Assessment Tax Returns. Secondly, any Capital Gains made on stocks and shares ISAs are also free of Capital Gains Tax. There are also Junior ISAs available to children.

Use your Capital Gains Tax Allowance
The CGT annual exemption for 2023/24 is £6,000, but from 6 April 2024 this reduces to £3,000 per annum. If you have any assets, such as stocks and shares, that have small gains you might want to consider selling them before 5 April 2024 to utilise your £6,000 CGT annual exemption for this tax year, and then you can reinvest the proceeds in further shares.