Tax is a necessary burden – one we probably all wish we can avoid. But since we can’t, the least we can do is to minimise your tax bill by taking advantage of available reliefs and allowances.
First, a word on the difference between tax planning and tax avoidance. Tax planning is a legal process whereby we can minimise your tax liability by making use of tax reliefs available to us. Tax avoidance or evasion is the illegal reduction of a tax bill by falsifying figures or not disclosing all income. Tax evasion carries severe penalties, and the culprit can be criminally prosecuted.
The concept of tax planning is simple. But don’t be fooled – tax planning is complex and is best left to the experts. Our tax specialists give you some pointers, so you’ll know what it’s all about and recognise whether you can benefit from tax planning services.
Reducing Taxable Income
If you receive income higher than £150,000, the portion that exceeds this threshold is taxed at 45%. This is quite steep, so one of the tax planning principles is to try and keep your income below this number. There are a few ways to do this:
Making donations to charitable foundations. Charity Choice is a nifty website listing charities; check them out to see which charities are in the East Sussex area. Make sure you choose a registered charity before you invest so you don’t miss out on your relief.
Contributing to pension funds.
Plan timing of bonuses by making sure it falls into the right year.
A portion of your salary can be sacrificed for other benefits or share options in the business.
Investing in an employee share scheme that offers tax advantages.
If you use your own car for business travel, you may be able to claim a tax-free mileage allowance from your employer.
A wear and tear allowance can be claimed on fully furnished properties which are let out.
Married Couples and Civil Partners
Special rules apply to married couples and civil partners. Certain assets and trade profits can be transferred between the two. This is handy when one partner has a low tax bill while the other is at a higher rate. Examples include:
Transferring income-generating assets between spouses and civil partners.
Married couples can claim a married couple’s allowance. Where one cannot claim the full benefit, it may be possible to transfer 10% of the personal allowance to the other partner.
Dividend income from certain assets which are owned jointly between spouses is usually equally divided between the two for tax purposes unless a joint declaration was made to say otherwise.
When assets are sold, it attracts a tax called Capital Gains Tax (CGT). The CGT rate is either 18% or 28%, depending on whether you’re on the basic or higher tax rate. If capital gains are foreseeable, the asset can be transferred to the spouse on the basic rate.
If you’re self-employed or operate an owner-managed business, there are further relief and structuring you can take advantage of. Some of these include:
Paying a salary to your spouse to decrease the business profit.
Losses from self-employment can be set off against other income. There is an annual cap, currently at £50,000 or 25% of revenue, whichever is the highest.
A director and shareholder can minimise his or her tax bill by splitting income between a salary, dividends, and benefits in kind.
Investments and Property
Certain investments attract certain tax reliefs and savings, such as the Individual Savings Account (ISA). Here are a few examples:
An annual amount can be invested in an ISA, tax-free. This number currently stands at £15,240.
Children under 18 can also have a Junior ISA. Parents and grandparents can contribute £4,080 per year to each child, tax-free.
Investing in an Enterprise Investment Scheme (EIS) or Seed EIS attract various tax incentives. The EIS carries a 30% income tax relief, while the SEIS carries a 50% relief.
Each individual is entitled to an annual CGT allowance and a special CGT allowance should you sell your principal residence. If you plan the sale of assets ahead, you can maximise your benefits if the sale falls in the correct year.
Wherever you are in East Sussex, Eastbourne, Brighton, Hailsham or Alfriston you’ll be near one of our offices. If you’re interested in reducing your tax bill, contact us so we can have a look at your income and structures and help you structure your income in such a way that you can take full advantage of tax reliefs available to you.