How to Prepare for the End of the Tax Year

Are you self-employed or a business owner and not sure if your end of year tax planning strategy is any good?
 

We have compiled a list of the main tax planning opportunities for both, which may prove helpful when preparing for the end of the tax year.
 

For the Self Employed

As an individual, whether you submit your own tax return or have an accountant who does it for you, planning for the end of tax year is all about making the most of what is available to you.
 

Pensions

The Financial Times reported last October that ‘a third of self-employed people have no retirement nest egg and are being left behind’.

Unlike employed individuals whose employers legally must enrol them in a pension scheme if eligible, self-employed workers do not – which means a missed opportunity when it comes to saving for retirement and tax planning.

You can contribute into a pension up to either 100% of your earned income or up to the annual allowance of £60,000, whichever is less.

When contributing to a pension personally, you receive ‘relief at source’. This means the pension provider can claim tax relief from the Government at the basic rate of 20% and add it to your pension pot.

This may not necessarily reduce your income tax bill at the end of the year, but when you are given what is essentially a ‘bonus’ from HMRC for saving for your retirement, it seems silly not to take it into consideration.

If you’re a higher rate or additional rate taxpayer, the additional tax relief can be claimed through your Self-Assessment Tax Return or by contacting HMRC directly. This can also be back dated over four tax years.

The up-side to claiming the additional relief? It doesn’t need to go back into the pension! It will either be paid out as a tax rebate, be a reduction in your tax liability, or you’ll see a change in your tax code.

Individual Savings Account (ISA)

Whether your preference is a cash ISA, or you’re happy to take a little more risk with a Stocks and Shares ISA, utilising this tax wrapper up to its annual allowance of £20,000 a year is a good way to help save for your impending tax bill in January.

With both interest from a cash ISA and income or capital gains from a Stocks and Shares ISA growing free of tax, it is a useful product to consider when tax planning.

Contributions can be made in regular monthly amounts or lump sums in both ISA types and there are no withdrawal charges or exit fees either, which means accessing the funds when you need them is straight forward.

The only time restraint would be for a Stocks and Shares ISA, is when the provider would need to sell down the funds to make the cash available to withdraw.

To top it off you do not need to declare any interest, income or capital gains from an ISA on your tax return!

Applying for an ISA is simple, and the majority of providers allow you to do it online, if your preference is a Cash ISA make sure to do your research on the best interest rate available.

If you like the sound of a Stocks and Shares ISA it may be worth speaking to a financial adviser if you are not sure about managing the investments yourself.

Marriage Allowance

Each person has an annual Personal Allowance, which is currently fixed at £12,570 along with the tax rates until the 5th of April 2028.

The Marriage Allowance lets a person transfer £1,260 of their Personal allowance to a spouse or civil partner, which can reduce their tax by up to £252 in a tax year.

For this to be worth doing, the lower earner would normally have to have an income below the Personal Allowance, and it may mean by transferring part of their personal allowance to their spouse/civil partner, that they would now be subject to tax but as a couple you could pay less.

This would benefit you if:

• You’re married or in a civil partnership
• You do not pay income tax or your income is below the Personal Allowance of £12,570.
• Your spouse/partner pays Income Tax at the basic rate.

Claims can be made online, and they can be backdated to include any tax year since the 5th of April 2019 that you could have been eligible for Marriage Allowance.

Tax bills will be reduced depending on the Personal Allowance rate for the years you would like to be backdated.
 

If you're a Business Owner

There are many benefits to being a director of a limited company and being more tax efficient is certainly one of them.

Employer Contributions

As a limited company your profits are subject to Corporation Tax, depending on the level of your profits you could be paying 19% for profits less than £50,000 and up to 25% for profits greater than £250,000.

There are ways to get relief from Corporation Tax, one of these ways is by contributing into a pension scheme as an Employer.

Not only does it help save for retirement, but it is also a tax efficient way of using the profits from your business since employer contributions are classed as an ‘allowable expense’.

Where an individual can contribute either 100% of their earned income or up to the annual allowance of £60,000, whichever is less, as an employer they can contribute the maximum allowance of £60,000 in a tax year even if the directors earned income is less than this.

They could also potentially contribute more than this using ‘carry forward’. Carry Forward allows you to fulfil unused pension allowances which have not been used in the last 3 previous tax years including the current tax year, giving a potential pension contribution of £180,000 including tax relief.

Managing Income

Another benefit to being a business owner is being able to minimise your tax liability by paying yourself in Salary and Dividends.

A common strategy among company directors is to pay themselves salary up to their Personal Allowance of £12,570 and then take the rest of their desired income in dividends.

There are benefits related to taking a salary which include entitlement to state pension and pension contributions, dividends are not classed as earned income so taking them on their own would not be beneficial to you.

Compared to income tax, dividend tax is considerably less, and you also have an annual dividend allowance of £1,000 for the 2023/24 tax year, this reduces to £500 for the 2024/25 tax year.

Income Tax Vs Dividend Tax Rates

For example, if taking a £30,000 a year income (not taking into consideration National Insurance Contributions), was to be paid purely as salary, the income tax liability would be approximately £3,486.

However, if you took £12,570 salary, where no income tax would be payable, and then took the remaining £17,430 as dividends, using your £1,000 dividend allowance would mean the tax liability would be roughly £1,437.63. So achieving a saving of just over £2,000.

It is worth noting that there are a few disadvantages to taking part of your income as dividends instead of salary which includes the fact that dividends do not reduce Corporation Tax liability as they are paid out of post-tax profits and dividend income can fluctuate year on year as they are dependent on the company’s profits.

It is always best to speak with an accountant or tax adviser to ensure that you are taking income as tax efficiently as possible.

Research & Development 

Your company may be eligible for Research & Development (R&D) Tax Reliefs which will help reduce your Corporation Tax liability.

To be able to qualify for this relief your company needs to be part of a project where the work being carried out is aimed at making an advance in science or technology and relate to your company’s trade, either your current trade or one that you will be starting based on the results of the Research & Development. 

It could be that you are developing a new process, product/service or you may be working to improve an existing one.

There are two types of R&D relief:

1. Small and medium Sized enterprise (SME) R&D tax relief – aimed at companies with less than 500 staff and a turnover of under 100 million euros or a balance sheet under 86 million euros.
2. R&D expenditure credit (RDEC) – Large companies, over 500 staff can claim this relief for working on R&D projects.

You can claim either of the above reliefs in your Company Tax Return. However you may need to submit a claim notification form to HMRC in advance of making the claim in your Tax Return, and you must submit an additional information form to support your claim. 

Information can be found on the Government website about what information you need to submit as well as when, and how to submit.

By taking the time to strategise and plan for the end of the tax year, you can reduce both your income and corporation tax bills, build retirement savings in an efficient way, and set money aside for the tax you do have to pay. 

For help planning your taxes, don't hesitate to get in touch with our team.

*This article is for information only and should not be seen as advice or a recommendation to take action. Note that the value of investments can go down as well as up and you are not guaranteed to get all your capital back.

** Aventur is authorised and regulated by the financial conduct authority.  The financial conduct authority does not regulate tax planning and some forms of business financial planning.

*** Aventur cannot be held responsible for content on 3rd party websites.