By implementing some key tax planning strategies ahead of the year end on 5 April, you can help to ensure that both your business and personal finances remain tax-efficient. Here we feature some planning strategies that you might like to consider putting into action before 6 April 2016.
Utilising personal allowances
For 2015/16, the tax-free personal allowance is set at £10,600 for those born after 5 April 1938, and £10,660 for those born before 6 April 1938. If a spouse or partner has little or no income, it may be useful to transfer over income or income-producing assets so that they can make the most of their personal allowance. You should beware the settlements legislation governing 'income shifting', and also consider the legal consequences of transfers.
You should also beware the 'hidden' income tax rate. In 2015/16, the 40% rate of tax begins when your taxable income exceeds £31,785. However, personal allowances are clawed back by £1 for every £2 by which your adjusted net income exceeds £100,000, leaving you open to an effective tax rate of 60%! A number of strategies may allow you to reduce your taxable income for 2015/16, such as delaying income into the next tax year, or increasing pension payments.
Making the most of your ISA allowance
You have until 5 April 2016 to make your 2015/16 ISA investment. Adult savers may invest in a combination of cash or stocks and shares up to the overall annual subscription limit of £15,240 for 2015/16. Individuals may only pay into a maximum of one Cash ISA and one Stocks and Shares ISA each year.
Extracting profit from your business
Currently, a dividend is paid free of national insurance contributions (NICs), while a salary or bonus can carry up to 25.8% in employer and employee contributions - however, a salary or bonus is generally tax deductible for the company, whereas dividends are not.
With a new regime applying to dividend taxation with effect from April 2016, you may wish to consider increasing your dividends before 6 April 2016. There may be other tax issues to take into account, such as loss of the personal tax allowance if your total 'adjusted net income' exceeds £100,000. Please contact us for further advice.
Making pension contributions
Personal contributions to pension schemes attract tax relief worth up to 60%. To be applied against 2015/16 income, pension contributions must be paid on or before 5 April 2016. Tax relief is available on annual contributions limited to the greater of £3,600 (gross) or the amount of UK relevant earnings, but also subject to the annual allowance.
For more information and support in implementing a range of tax-saving strategies before the year end, please do not hesitate to contact us.