The 2014/15 tax year started on 6th April 2014. It presents an excellent opportunity to save some tax for you and for your business. Set out below are 10 relatively simple tips.
1.Salary sacrifice –everyone’s a winner
Paying salaries is an expensive affair, thanks to Employers’ National Insurance Contributions (NICs) at nearly 14%. Converting some of your salary into tax-favoured ‘benefits’ such as approved Childcare Vouchers, or employer pension contributions, generally means a saving for the employee and the employer.
Bill takes an annual salary of £60,000 so he pays tax at 40% and Employees’ NICs of 2%. The company is also paying Employers’ NICs at 13.8%. The Board of directors confirms bonuses at £10,000 to each director. Bill doesn’t need the money immediately but is unhappy with losing £4,200 in tax and NICs so he proposes to take his bonus as an employer pension contribution. The Board readily agrees to put £11,000 into his pension pot, since the company will still come out better off, having saved £1,380 in NICs.
2.Claim for use of home or homeworking expenses
This applies to both the self-employed and employees. Over the last few years,HMRC has given much publicity to what it sees as ’acceptable’ claims for working from home. These amounts are quite modest but higher amounts may be claimed if they can be justified.
For the self-employed, www.gov.uk/simpler-income-tax-simplified-expenses/business-use-of-your-home sets out a table which reaches a maximum £26 a month for someone who works from home for more than 100 hours each month – but note that this allowance does not cover mortgage interest, rent or council tax.
Employees can be reimbursed up to £18 a month tax-free if they have ’homeworking arrangements’ which may be voluntary. If there is no reimbursement, a stand-alone claim can only be made where arrangements are mandatory.
From the perspective of employer, remember that these tax-free reimbursements are also free of Employers’ NIC.
3.Is a ‘company car’ really worth it?
The tax charge on company cars – and particularly private fuel where provided – continues to rise. The effective cost to the employee is additional tax on the calculated benefit but even so, the fuel scale charge is a flat rate which punishes occasional private use. The tax charge ignores the value of a car and taxes its list price when new. Bearing in mind how quickly cars depreciate, it may not be too long before you are paying tax on its real value, or more, every year. How can that be tax-efficient?
4.Families and business – why keep it all to yourself?
A very good (tax!) argument for bringing spouses and other relatives into the business is that they then also get to utilise their tax-free Personal Allowances and lower tax bands. Frequently this is done on a salaried basis but the self-employed also have the option to take on a business partner. If a person paying 40% tax brings his or her spouse (who has no other income) into the business, they can save over £4,000 in tax just by utilising the second Personal Allowance. Likewise for children. But remember that they must do valuable work in order to ‘earn’ a salary, otherwise HMRC will say the income really ‘belongs’ to the first spouse. HMRC arguably finds that more difficult with profit-shares between partners.
5.Watch the tax bands
This year, (2014/15), most people will be able to receive income of £41,865 before having to pay 40% tax. But many will exceed this limit – it was recently estimated that almost a million more people have become Higher Rate taxpayers since the last election because the threshold has come down in real terms over the last few years, thanks largely to inflation. Beyond that is the £50,000 income limit above which families start to lose their Child Benefit entitlement: the effective tax rate soars then to around 60% for a two-child family. If you can afford to make a pension contribution or sacrifice some salary to ‘duck’ under these rates, then it makes sense from a tax perspective.
6.Optimising the salary/dividend mix for own companies
In 2014/15, most people could receive a salary of up to £7,956 before having to account for NICs. Ignoring any other income, dividends received above that amount for the next £33,909 (gross – equivalent to £30,518 net of the 10% dividend tax credit) would cost no further tax. This approach is not suitable for all owner-managed companies but it is useful to be aware of the arithmetic, if nothing else.
7.Split/transfer your investment income
Another way to ensure that you maximise the available allowances and lower tax bands is to move ‘other’ income to a lower-earning spouse, partner, etc. As many readers will know, you cannot simply move the income but instead the underlying investment – cash balance, shareholding or investment property – must normally be transferred. It is worth mentioning that there is a standard CGT ‘exemption’ for transferring assets between spouses or civil partners but caution is generally advised to ensure CGT (or Stamp Duty Land Tax for property interests) is not triggered.
8.Capital instead of income
In a similar vein, don’t forget that HMRC grants most people (at least) two tax-free exemptions each year – the Income Tax Personal Allowance (£10,000) and the Capital Gains Tax Annual Exemption (£11,000). With proper structuring, it is possible to arrange for certain investments to yield capital growth instead of income, so that investment returns are effectively removed from your Income Tax calculations.
9.Keep your trade eligible for ER/BPR
Making sure that, where possible, the business is eligible for CGT Entrepreneurs’ Relief (ER), and Business Property Relief (BPR) for Inheritance Tax, is extremely important but sometimes overlooked until too late. Both tax reliefs require a run-up ’qualifying period’ and if that is failed, then the Reliefs may be forfeit. For ER, the company must have been a qualifying company for at least one year before disposal, while for BPR it is normally two years. The criteria are not the same, although there are similarities.
ER can potentially cut CGT down from 28% to just 10%. BPR acts as a complete exemption from IHT in most cases where it applies but something which has the potential to scupper both is where there are non-qualifying or excluded activities – broadly investment activities. The rules are complex and detailed but if you are planning to sell or to gift/settle a business interest, it is advisable to check the availability of these reliefs well in advance, and to take steps to ensure the business qualifies.
10. Capital allowances – fine tuning
The Chancellor has just announced that the 100% immediate Annual Investment Allowance will be temporarily enhanced to cover qualifying expenditure on business plant, equipment and machinery of up to £500,000, up until 31 December 2015. While that may not be of interest to some, remember that the underlying eligible amount is only £25,000, which will easily restrict the spending of many businesses when it bites again from 1 January 2016. So spending more now may well be helpful; but don’t forget that you can disclaim as much of your Capital Allowances as you like. This allows you to fine-tune your profits – or your losses – to ensure that waste is minimised. For instance, if you are self-employed, it may be worth restricting your claim so that profits reduce to exactly £10,000 as anything less is already covered by your Personal Allowance, leaving only some NICs to pay.
Hopefully, plenty of ideas and opportunities to help business owners to save tax.
A business can buy eligible equipment on the last day of its accounting period and still get full Capital Allowances – very useful if profits are heading into a higher tax threshold!