As the 2019/20 tax year draws to an end, below I provide a few tips on things you may wish to consider to mitigate or avoid paying excessive tax.
Review your income levels and marginal tax rates
Assess if your taxable income for 2019/20 falls into a band that suffers from disproportionately high effective tax rates. You will need to estimate and add together all your income from all sources – dividends, interest income, employment, property, investment income, pensions and all other income.
If your income is above £50,000, the High Income Child Benefit Charge is applicable. You will also start paying tax at 40%.
If your income is above £100,000, the personal allowance is restricted and completely withdrawn over and above £121,200.
If your income is above £150,000 the amount you can save into a pension is tapered.
High earners may consider taking a holiday, making additional pension contributions or gift aid contributions to reduce tax impact.
For sole traders or partnerships, the annual investment allowance limit will reset on 6 April 2020. You may wish to consider bring forward or delaying significant expenditure in order to maximise the use of your allowance.
Limited company directors (owner managed businesses)
Consider extracting funds and paying yourself in the most tax-efficient way. You could optimise a few strategies as follows:
- Splitting income with a spouse or family members
- Having different classes of shares would enable different levels of dividends to be paid
- Maximise the dividends threshold – up to £2,000 is tax free and between £32,000 to £33,500 (approximately) is taxed at 7.5. Higher dividends will be taxed at 32.5%. The rate at which you will be taxed on dividends is subject to any other taxable income you may have received.
- Review the director loan accounts and consider s455 tax on outstanding balances.
Companies cars are subject to the car benefit and car fuel benefit charge. In order to reduce or avoid any addition income tax liability, consideration can be given to making capital contributions towards the value of the car as well as paying back the cost of fuel that is used privately (where fuel is provided by the employer).
If you would like to discuss issues arising from this article or to find out more on the applicable tax strategies, please contact Tobi Lab via email at email@example.com.