Make sure you pay no more than you need to

With the end of the 2017/18 personal tax year just over three weeks away, it’s time to do some housekeeping and ensure that your tax position is as efficient as it can be.

Whilst we will do everything that we can, here at EBA, to ensure that you pay no more than you need to in respect of your personal taxes (income tax and capital gains tax), there are things that you can do too. In some cases, there are decisions you’ll need to make and actions you’ll need to take if you feel that anything you read here might be beneficial.

Income tax rates for 2017/18

Firstly, here’s a reminder of the tax rates applicable to the current tax year.

First £11,500 of income – 0% (personal allowance)
Next £33,500 of income – 20% on most types of income* but only 7.5% on dividends**
Over £45,000 and up to £150,000 – 40% on most types of income but 32.5% on dividends
Over £150,000 – 45% on most types of income but 38.1% on dividends
*personal savings allowance – first £1,000 of interest tax-free for basic rate taxpayers (£500 for higher-rate taxpayers)
**dividend allowance – the first £5,000 of dividend is exempt from the 7.5% charge

The objective is, as far as possible, to utilise the lower rates of income tax for both yourself and other members of your family, where relevant.

Bring dividends forward

The dividend allowance of £5,000 will drop to £2,000 on 6/4/18. This will mean that we’ll pay the dividend tax (7.5%) on an additional £3,000 of dividend. The additional cost to every taxpayer receiving dividends of £5,000 or more will be £225 per annum. If you have an option, consider taking dividends before 6/4/18 rather than afterwards.

Protect Child Benefit

If you have children and receive Child Benefit, look at the total incomes of both yourself and your partner. If either one of you has income in excess of £50,000 then Child Benefit is gradually withdrawn. If income of either partner reaches £60,000 then it’s clawed back completely. So, look at how you might be able to engineer both incomes so as not to exceed £50,000, perhaps by switching income around between you.

Donate tax-efficiently

Consider making donations under Gift Aid to a registered charity. If you donate say £80 then the charity can claim back £20 from HMRC. If you’re a higher rate taxpayer, you’ll get £20 off your personal tax bill which reduces the true cost of your donation to £60. So, it costs you £60 and the charity receives £100. If you’re in a position to donate assets to a charity then this can be done without having to pay capital gains tax on transfer of the assets.

Making payments back to your company for benefits in kind

It will soon be time for us to produce P11D’s for our clients and their employees. If you have any benefits in kind (company car, private medical insurance etc. paid for by the company) it could be worth looking at making a payment from yourself back to the company to reduce the size of the benefit in kind. So, if your company car benefit in kind value works out at £5,000 for 2017/18 and you pay £3,000 back to your company, you’ll only be taxed on £2,000 rather than £3,000. Have a word with me if this applies to you.

Efficient company cars

If you drive a company car, look at changing it for a more tax-efficient vehicle. The lower the CO2 rate, the less personal tax you’ll suffer because the benefit in kind (P11D value) is based on the CO2 emission. Electric and hybrid vehicles are the most tax-efficient to drive as company cars. The benefit in kind charge for drivers of company diesel cars will rise considerably from 6/4/18. This is something to look at for the new tax year 2018/19with a view to reducing the amount of tax you currently pay, if relevant, on a company car.

Mind the gap!

I realise that this won’t be applicable to everyone but, if you’re in the fortunate position of having income for 2017/18 of between £100,000 and £123,000, you may well want to consider ways in which you can reduce it to below £100,000. That’s because, as well as paying income tax of 40% (32.5% if it’s on dividends) on every additional pound of income, you’ll suffer a withdrawal of the £11,500 personal tax allowance. It’s taken away at a rate of 50% of every extra pound of income over £100,000. So, if your income is £110,000, your personal tax allowance will be reduced by £5,000 to £6,500. The combined impact of the reduced personal allowance and the higher rate tax means that over 60% of the income you earn between £100,000 and £123,000 will be paid to HMRC. If your income is likely to be in this band, consider some of the options below to reduce it.

Please give me a call if you’d like to discuss any of the above points.

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