The end of the tax year is approaching fast, firms and accountants are advised to consider if there are any actions to be done before the end of the year to optimise their tax position. Many tax reliefs and allowances are available, creating the financial future you want for your company.
This current tax year ends on the 5th of April 2022.
Specific points to keep in mind are:
Salary for spouse:
If one spouse is very active in the company, whereas the other is not but still receives a personal allowance, thought might be given to whether paying a smaller salary to your spouse is justified. However, the amount paid must reflect the work undertaken by the spouse. If that is the case, this can offer a tax-deductible expense to the business equal to the salary while the receiving spouse will not have to pay tax on their salary.
Depending on what your spouse earns, it may also be a good idea to consider taking advantage of the marriage allowance.
State Pension Credit:
Pension credit gives you extra cash to help with your living costs if you are over the state pension age and have a low income. State pension credit offers the benefits of not having to pay tax or NIC on the money received. For more information, head over to the HMRC website.
Minimising the tax on savings income:
Where two sources have different income levels, E.g. one person is on a higher-paying tax band, and the other has a non-savings income within the personal allowance, you could try transferring the interest baring investment to the lower earner. This transfer can be done free of capital gains tax and can give lower earners access to the £5,000 starting rate for savings in which no tax rates apply.
There is also a separate ‘personal savings allowance’ of up to £1,000, which can also be utilised to minimise the joint overall taxable amount of the spouse’s earnings. Tax savings can be made if one spouse s a higher rate taxpayer and the lower-earning spouse is not. Tax savings can be made by transferring interest-bearing assets to the lower earner.
Pension contributions should not be overlooked as it remains very tax efficient. Although it is complex, pension contributions can result in a tax relief being awarded a marginal rate of 40% or 45%. However, if a taxpayer runs their business through a company, it should be remembered that dividends are not treated as ‘relevant earning’ for pension purposes.
The government offers tax relief to individuals to encourage them to invest in companies and social enterprises that are not listed on the recognised stock exchange. You can invest directly into qualifying businesses using a venture capital scheme to meet the required conditions.
The schemes are:
- Enterprise Investment Scheme (EIS)
- Seed Enterprise Investment Scheme (SEIS)
- Social Investment Tax Relief (SITR)
Divided allowance and timing of payment:
Small company directors should not forget that the first £2,000 of dividends are paid in a tax year is free. There can be a cash flow advantage to postponing dividends by a day. Dividend paid before the 5th of April 2022 will be payable n the 31st of January 2023, one year earlier than if the dividend were to be delivered after the 5th of April 2022.
But, please note that dividend tax rates will increase by 1.25% after the 5th of April 2022. Therefore, dividends may be paid in the current tax year, depending on the individual.
Capital gains tax annual exemption:
A taxpayer owns capital assets standing at a profit and has their annual capital gains tax exemption of £12,3000 available. You should consider realising gains within this limit. Purchases can be transferred between spouses tax-free. This gives an annual joint tax-free allowance of £24,600 for married couples.
Inheritance tax reliefs:
You are allowed a £3000 yearly exemption. This means that a gift up to this amount cannot be taxable. You can also bring forward the unused allowance for one year. Therefore, if a married couple has not made any gifts either at the end of year 5th April 2021, or the current year which will end the 5th of April 2022, they can make gifts up to £12,000 under this relief.