In times of recession you need to make sure that you use every allowance available to you. Francesca Lagerberg, Head of National Tax at Grant Thornton provides this list of top tax tips for Alternative Investor.
1. Use all your allowances - Each member of the family, even a minor, is treated as a separate taxpayer and has his or her own personal allowances and exemptions. Spreading assets and income around the family can therefore reduce the overall tax bill. However, there are pitfalls to avoid. For example, if parents give capital that generates income of more than £100 a year – excluding income from child trust funds and National Savings Children’s Bonus Bonds – to children under 18, the parents are then taxed on that income until the child either becomes 18 or marries before reaching that age.
You may be concerned that the transfer of assets could give rise to tax bills. However, those who are married or in a registered civil partnership can transfer assets between themselves without any tax applying. This could lead to capital gains tax savings, where, for example, one spouse transfers part of a share portfolio to the other, enabling both of them to utilise their capital gains tax annual exemptions on a sale.
Changes are expected to the tax rules that apply when couples and others allocate income between each other (eg the settlements legislation and the proposed income shifting rules). Transfers of assets in order to utilise capital losses could potentially be caught by targeted anti-avoidance rules.
2. Check your PAYE code so you are not paying the wrong amount of tax - If the coding notice is wrong, too much tax could be being deducted and this will not be picked up by your employer. Furthermore, the tax authority will assume that you have checked your code and that you are happy for the tax to be collected.
3. Maximise your contributions to Individual Savings Accounts (ISAs) - An ISA is a tax-efficient investment for savings. The maximum permitted contribution this year is £7,200. If ISAs form a key element of your savings and tax mitigation strategy, and since unused contribution allowances cannot be carried forward, it is important to utilise your full allowance before the end of the tax year.
4. National Savings Certificates - This type of investment also offers tax-free saving. You can invest up to £15,000 in each issue without it affecting any other tax-free investments you have and, with interest rates fixed for the length of your chosen term, you will know how much interest you will earn each year.
5. Do not leave it until the last minute - File early to claim tax repayments. You don't have to wait until the tax return filing deadline to claim a repayment of tax if you are due one. You may be due a repayment if, for example, you have made pension contributions or gift aid payments on which you wish to claim higher rate tax relief or if you are due any other reliefs that you are making a claim for through your tax return.
6. Salary sacrifice opportunities - Look at salary sacrifice opportunities available through your employer. For example, if you have children and your employer offers childcare vouchers in exchange for legally reducing your salary then £2,916 of your old salary can be received as childcare vouchers that are free from income tax and National Insurance.
NB Be aware that HMRC is looking very closely at certain salary sacrifice schemes which it considers are less 'acceptable' eg those involving retail items, food and utility costs.
7. Rent-a-room relief - If you rent out furnished accommodation in your only or main residence, rental income of up to £4,250 per annum may be left out of account when calculating taxable income. Taking in a lodger could help out both parties - the homeowner in meeting their mortgage repayments and for the lodger it may represent cheaper accommodation if rents are set to rise as predicted.
8. Using your own car for business - An employer can reimburse up to 40p per mile tax free for the first 10,000 miles travelled. The rate then drops to 25p per mile for income tax (but remains at 40p per mile for National Insurance). These are the maximum amounts that can be reimbursed by employers. If your employer pays less, it is a little known fact that you can claim tax relief for the difference.
9. Choosing your company car - as the tax charge is based on both the list price of the car and its emissions, both are worth taking into account when considering your choice of company car. Qualifying low emissions cars (QUALECs) create a taxable benefit of only 10 per cent of the list price of the car.
10. Pension contributions - even though you may be more worried about your income now, don't forget about saving for the future. Pensions are extremely tax efficient too. Not only are contributions to a pension fund fully allowable for income tax but the assets in the fund can grow tax free. Even better, if you can persuade your employer to make contributions to your pension, not only is that contribution in effect tax-free salary but both you and your employer will avoid paying National Insurance on that amount.
11. Inheritance tax shelters - you may be less inclined to make lifetime gifts at the moment, but you should not forget sensible tips for ensuring that assets do not form part of your estate for inheritance tax purposes. For example, life assurance policies should be written in trust so that they do not form part of your estate on death and worsen the inheritance tax position. If the proceeds go directly to the beneficiaries, there is no tax to pay, but if they fall into the estate they could be charged to inheritance tax.
12. Separate your personal wealth from your business - If you are not planning to invest cash back into your company, then consider paying it out to the shareholders by way of dividend.
13. Investing in your business - if you reinvest the profits of your business, ensure that you do so in a tax efficient manner. Some capital expenditure can benefit from immediate tax relief for 100% of the cost including the annual investment allowance for the first £50,000 of qualifying expenditure. Loss-making companies may claim a credit against their PAYE and NIC costs instead of an immediate write off for investment in energy-efficient or water-saving plant. A business can claim 100% allowances for a surprising range of new cars if the car is electrically propelled or has a carbon dioxide (CO2) emissions rating not exceeding 110g/km. Where capital allowances are due on expenditure, there is a cash flow advantage if the expenditure is incurred near the end of the accounting period.
14. Pay your tax on time - Delaying payment will cost more in the long run as interest penalties and surcharges will be levied. However, if you will have trouble paying your tax bill, speak to HM Revenue and Customs as you may be able to negotiate paying on an instalment basis.
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