Planning for tax before the end of the tax year
QUESTION: The tax year is almost over. What can I do to structure my business and personal finances so that they are as tax efficient as possible?
ANSWER: The end of the tax year on April 5 is fast approaching, and this is always a good time of year to think about ways to structure your business and personal finances so that they are as tax-efficient as possible. With new rates and various legislative changes due in the 2017/18 tax year, here are some of the planning strategies you might wish to consider:
:: Utilise personal allowances - Every individual has their own tax-free personal allowance for income tax purposes, which for 2016/17 is £11,000. Where a spouse or partner has little or no income, transferring income or income-producing assets to them can help to make the best use of their personal allowance. However, take care to avoid falling foul of the settlements legislation governing 'income shifting', and consider the legal consequences of transfers. Meanwhile, the Marriage Allowance means that, in this tax year, up to £1,100 of an individual's personal allowance may be transferred by eligible spouses and civil partners to their husband, wife or civil partner, where neither pays tax at the higher or additional rate This can reduce their tax bill by up to £220.
:: Beware of the 'hidden' income tax rate - In 2016/17 the 40 per cent higher rate of income tax begins when your taxable income exceeds £32,000. However, if your income exceeds £100,000 you could actually be liable to an effective rate 60 per cent. This is because your personal allowance is clawed back by £1 for every £2 by which your adjusted net income exceeds £100,000.
:: Extracting business profits: dividend or salary/bonus? - When it comes to extracting profit from your company, it is important to consider both the tax and business implications of the various options available. The question of whether it is better to take a salary/bonus or a dividend requires particular careful consideration. A dividend is paid free of national insurance contributions (NICs), whilst a salary or bonus can carry up to 25.8 per cent in combined employer and employee contributions. However, a salary or bonus is generally tax deductible for the company, whereas dividends are not. April 5 is the last date for paying a 2016/17 dividend, and any higher or additional rate tax on that dividend will not be due until January 31 2018.
:: Company car considerations - Despite increases in tax charges, company cars remain a popular benefit for many employees and a key business tool for employers. However, tax and national insurance costs could mean that the company car is not the most tax-efficient option for either employer or employee. The basis for taxing those who use company cars is to tax a figure calculated by multiplying the car's list price by an emissions-based percentage (the 'appropriate percentage'), with a 3 per cent surcharge on diesel powered cars. Where the employer pays for any fuel used privately by the employee, there is an additional benefit charge calculated by applying the C02-based car benefit percentage to the car fuel benefit charge multiplier of £22,200. You might want to consider carrying out a complete review of your company car policy, as it could prove more beneficial to pay employees for business mileage in their own vehicles at the statutory mileage rates. In some cases, an employer provided 'van' may be a viable alternative to a company car.
These are just some of the areas where you may be able to minimise your tax bill before the end of the tax year on April 5.