End of year tax planning
The end of the tax year marks the perfect time to review your finances. There are some important changes to bear in mind for the 2018/19 tax year and the chance for business owners and individuals to make the most of available reliefs and allowances.
We have outlined the changes on the horizon and other opportunities that should be considered as part of your end of year tax planning.
Year-end owner remuneration – changes to the dividend nil-rate band
Historically dividends have been a tax-efficient way for directors of limited companies to extract income from their businesses. But the tax-free threshold will change from £5,000 to £2,000 at the start of the new tax year. Although a newly reduced rate of corporation tax (19%) will go some way to off-setting the reduced allowance, it will not make up for the tax rates paid over this amount.
These changes will make profit extraction from dividends less favourable which offers a good opportunity to review your approach to make sure you are using the best available options.
For contributions to personal pension plans, tax relief is available when money is invested but taxable when it is withdrawn. There are limits to how much can be invested in a pension scheme before a tax charge is payable.
The annual allowance is currently £40,000. However, it may be possible to make additional contributions in respect of unused allowances from the previous three tax years, providing you were a member of a registered pension scheme during that time.
From 2016/17 and onwards, for individuals with an annual income over £150,000, the annual allowance is restricted on a tapered scale. For every £2 of income over the limit, the annual allowance is reduced by £1 to a minimum of £10,000 once annual income exceeds £210,000.
Bearing in mind that the maximum allowance of £40,000 is not restricted from the 2014/15 or 2015/16 tax years, using up any of your unused allowance from these two years offers a worthwhile planning opportunity.
The new main residence nil-rate band (RNRB) was introduced in this tax year at a rate of £100,000 for deaths occurring in 2017/18. For the 2018/19 tax year, this allowance will rise to £125,000. The residence nil-rate band only applies to properties that are passed on to direct descendants (a child, step-child or grandchild). When combined with the nil-rate band it will potentially provide a total combined nil-rate band for spouses and civil partners of £900,000 for 2018/19, rising to £1m in 2020/21.
The rules surrounding this allowance are complicated and advice should be sought to ensure that your estate is being administered in the correct way to make the most of the available tax advantages. The end of the tax year marks a good opportunity to review your IHT plans to make sure you are making the most of the nil rate bands and other exemptions to reduce the value of your taxable estate or alter the spread of your investment portfolio to be more efficient for IHT.
If you don’t already have an ISA it may be worth starting one before the start of the new tax year.
Despite the current interest rates on ISAs remaining low, they are still a useful place to put savings if you have reached your annual savings allowance or are ineligible for one. The overall ISA saving limit for 2017/18 is £20,000. There is no tax relief when money is paid into an ISA but no tax on income or gains made by the scheme, and no tax when withdrawals are made. Its value will however form part of an estate for inheritance tax purposes.
It may also be worth considering a Lifetime ISA (LISA). Introduced in April 2017, they allow adults to contribute up to £4,000 per year and receive a 25% bonus from the government.
Enterprise Investment Schemes (EIS)
To encourage investment in risky start-up enterprises, the government made measures in the 2017 Autumn Budget to double the limit on the amount an individual may invest under EIS in a tax year.
The amount will increase from £1 million to £2 million from 6th April 2018 providing any amount over £1million is invested in one or more ’knowledge-intensive companies’. These are companies whose operating costs are mainly in research and development (R&D).
Rules can be complex but, with proper advice, these schemes can deliver significant income tax and capital gains tax advantages. The benefits of investment can also be carried back a tax year, so there is scope for planning ahead for the introduction of the increased limit.
Tax-Free Childcare Scheme
The new Tax-Free childcare scheme was launched by the government in April 2017 to help support both working and self-employed families with the cost of childcare. You can get up to £500 every 3 months (£2,000 per year) for each of your children under 11 years old.
Parents can open an online childcare account to pay for registered childcare and for every £8 the parent pays, the government will add an additional £2 to your account. To be eligible, you must be earning at least £120 per week and neither you nor your partner has taxable income over £100,000 a year. The earnings limit doesn’t apply if you are self-employed and started your business less than 12 months ago.
Please note, for this scheme to be eligible you must not be receiving other support, for example, childcare vouchers or working tax credits.
Other available schemes can be used in conjunction with this providing certain eligibility criteria are met. More details on this can be found on the government website – https://www.childcarechoices.gov.uk/
From 6 April 2018, childcare voucher schemes run by employers will close to new applicants, you can keep getting vouchers if you have joined the scheme and get your first voucher by 5 April 2018. You must stay with the same employer and you cannot take any unpaid career breaks of longer than a year.
You can take up to £55 a week of your wages as childcare vouchers, which you don’t pay tax or National Insurance on. Please note, they may affect the amount of tax credits you get.
Tax rates and rules are ever-changing so it is important to review your financial situation regularly. What could have been effective tax planning in 2017/18 may no longer be the best option for the new tax year. To ensure you are making the most of what is available to you or your business it is important to seek advice.
For help with your end of year tax planning contact us or your usual WMT advisor.