Year End Tax Planning

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Personal Allowance

Ensuring each spouse uses their full Personal Allowance for income tax purposes where possible. Income of less than currently £7,475 is not liable to tax. Spouses/civil partners should consider the possible transfer of income producing assets to ensure that Personal Allowances are not wasted.

Self Employed

If a self-employed person or family company employs a spouse to assist in the running of the business, the spouse could be remunerated fairly to utilise the tax-free Personal Allowance. It is possible to set the earnings at a level whereby no tax or National Insurance Contributions will be due but entitlement to State Retirement Pension and other benefits is protected.

Minor Children

Minor children are entitled to Personal Allowances. There are restrictions on the amount of income that a child can derive from a parent but gifts from other relatives can be considered. Junior Individual Savings Accounts (JISAs) can be funded by parents. Teenaged children can be employed in family businesses providing legal restrictions/national minimum wage issues are taken into account.

Pensions

Pension contributions of up to £3,600 gross per year can be made by individuals with no taxable income. The net contribution after tax relief contributed at source by the UK Government would be just £2,880.

Savings Accounts

The use of tax-favourable investments such as Individual Savings Accounts (ISAs), Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT) should be reviewed.

Timing of Income

Taxable incomes may fluctuate from year to year as a result of one-off payments or changes in circumstances. Consideration should be given to the benefits of accelerating or deferring the taxation point of investment income, employment bonuses etc., and also to the timing of the payment of dividends paid out by family owned companies. Similarly, the acceleration of expenditure on business expenses/capital assets qualifying for capital allowances could prove beneficial.

Income Tax

Taxable income of between £100,000 and £114,950 is effectively taxed at a rate of 60% due to the loss of the Personal Allowance, which is reduced by £1 for every £2 of income between £100,000 and £114,950. Deferral of income may therefore save tax at the rate of 60% although planning might also include the use of additional pension contributions, charitable donations, etc.

Employment

Employers should review benefits provided to employees to ensure they are delivered in a tax-effective manner. Cars are taxed by reference to their retail list prices and carbon dioxide emission levels, and a review of the way cars/private petrol are provided could produce tax and National Insurance savings. HM Revenue & Customs has recently confirmed that “smartphones” qualify as “mobile phones” and can be provided tax-free. Refunds for previous years may be due.

Businesses

Businesses should review whether a change of accounting date might prove beneficial. Early profits of a business may be taxed twice, with “overlap relief” not due to be claimed until the business ceases. If an accounting date is chosen that is later in the tax year, this can reduce the overlap period and release relief that is not otherwise index-linked. Benefits may be significant if the trend is towards a decline in profits.

Capital Gains Tax 

Consideration should be given to utilising the tax-free Annual Exemption (currently £10,600). Each spouse/civil partner is entitled to the exemption each year so gifts between spouses prior to sales of assets may be tax-effective. It may be worth crystallising capital losses where gains in excess of the Annual Exemption have been made. The deferral of sales until after 5 April may see tax paid at lower rates and provide significant cash-flow benefits in terms of when tax needs to be paid. “Bed and breakfasting” to increase the base acquisition costs of shares is no longer tax-effective where shares are sold and re-purchased shortly afterwards, but planning with spouses/civil partners buying back the shares may still be tax-effective.

Inheritance Tax 

The use/carry forward of the £3,000 annual exemption should be reviewed, together with other possible exemptions such as those for small gifts of up to £250 per individual, regular gifts out of normal annual income, and tax-free gifts in consideration of marriage, which can range between £1000 and £5,000 depending on the relationship with the person getting married.