8 things to do before the end of the tax year

It's that time of year again when some planning in the last few weeks before the end of the tax year could provide a useful tax saving.

The tax year end for individuals is 5th April 2016. Many self employed people also have their accounting year end as 5th April or 31st March to coincide with the tax year. For private limited companies, 31st March is also a common date for the year end.

Here are some ideas:

1) Buy business assets before the year end

If you are thinking of investing in business assets - new plant & machinery, vehicles, office furniture, computer equipment it is sensible to make your purchase before the end of current financial year, rather than the start of the next one. Timing your investment could mean that you can claim your capital allowances sooner, saving on cashflow:

See this link for more details http://www.base52.co.uk/resources/tax-rates-and-allowances/capital-allowances

2) Manage your income

If you are in the fortunate position of being able to manage your income, plan now to optimise your income for tax purposes. For example, as a company director and shareholder, you may be able to reduce salary or dividends to keep your income below the key tax thresholds of £42,385, £100,000 or £150,000. An income level of £50,000 where child benefit is withdrawn from the highest earner in a household is another key threshold to monitor.

The £100,000 threshold is particularly painful from a tax perspective as the personal allowance is withdrawn. This gives an effective rate of tax at an eye watering 60% at income levels between £100,000 and £121,200. So best avoided if you don't need the income and can defer this to another year.

3) Consider the effect of the new dividend tax

A new dividend tax is being introduced from 6th April 2016. This will affect people who receive a significant amount of dividend income each year. There is a £5,000 dividend allowance where dividends are free of tax. Above this level however new rates of dividend tax will apply for varying levels of income. 

This will affect business owners in particular who may be used to drawing a relatively high proportion of their income as dividends. In some cases, if you are considering a substantial dividend, it may be advisable to bring this forward to 2015/16 rather than receiving the dividend in 2016/17 when the new taxes will apply. This will depend on your particular circumstances and it would be advisable to discuss this with your accountant before making any decisions.

http://www.base52.co.uk/news/latest-news-for-business/archive/news-article/2016/January/dividend-allowance-and-rates-of-tax

4) Contribute to a pension

Pension contributions before the year end are a tax efficient way of saving for the future and reducing your tax bill. Advice should be sought from a suitably qualified Independent Financial Advisor to ensure that your particular circumstances are considered.

5)  Use gift aid for donations

Using gift aid for charitable donations has the effect of raising the basic rate tax band and saving 20% tax for higher rate tax payers. So for every 80 pence you donate, your chosen charity receives £1.00. 

6) Use your tax free savings allowance

If you are lucky enough to have surplus cash, make sure that you use your annual ISA allowance. Within an ISA, all income and gains are tax free. 

You can now save up to £15,240 for 2015/16 and this limit will be maintained for 2016/17. You can choose how you split this between stocks & shares and cash ISAs. 

http://www.base52.co.uk/factsheets/personal-tax/individual-savings-accounts

7) Use your annual capital gains exemption

If you have personal assets (shares, property etc) and are intending to sell them soon, consider the capital gains tax implications in advance. You may be able to time the sales of shares for example to spread over 2 or more tax years and utilise your £11,100 2015/16 annual exemption effectively.

http://www.base52.co.uk/resources/tax-rates-and-allowances/capital-gains-tax

8) Set money aside for your tax bill

If you take some of the steps above you should be able to reduce your 2016 tax bill. 

If all or some of your income is not taxed at source however, it is likely that you will be faced with a tax bill for 2015/16.

Setting a percentage of your income to one side to cover your tax bill and placing it in a deposit account is a sensible measure and will help avoid any last minute panics in January trying to find the funds. Another tip is to get your tax return completed as soon after the end of the tax year as possible. This give you an early warning of any additional tax due so that you have sufficient time before the payment deadline in January.

www.base52.co.uk

What has the government ever done for us?

Mimicking the famous line about the Romans in 'Life of Brian', let's imagine we have a group of men and women who run their own small businesses and one of them asks this question about the current government. Just to clarify, when I say 'small' business, I mean 'small'. Let's say below £200,000 annual sales. I don't have the precise numbers to hand but I would imagine that this would cover the vast majority of businesses currently trading in the UK. Typically the owners are not fantastically wealthy. The more successful ones will have taken risks and made sacrifices to get their business to a stage when they can draw a reasonable income from it. 

Let's look at the positive things the Government has done for this sector. Corporation tax rates are relatively low and are set to fall further from the current level of 20% to 18% by 2020. They have introduced an employment allowance for employers which reduces their national insurance bill. In 2016/17 this will be an allowance of £3,000 per annum. (Note though that this only benefits businesses that have employees on the payroll above the NI threshold and it does not apply to single director businesses). The capital allowance thresholds are relatively high but in reality these only benefit larger businesses who invest at a higher level. That's about it. Oh, there's also small business rate relief although that only benefits businesses that own or rent their business premises. 

Now let's look at the negatives. The biggest debit has to be the introduction of the new dividend tax from April next year. This will add a significant personal tax burden to small business owners who run their own limited companies. The stark choice is that they  will need to make cuts to their own personal drawings or cut back in their businesses. It is also becoming increasingly apparent what a huge overhead the new mandatory employment pensions will be for the smallest businesses. For businesses struggling to keep up with HMRC compliance this is another unwelcome administrative burden being foisted on them, with minimal practical support. Then there is the new National Living Wage being introduced from April. Larger businesses have the capacity to cope with this. Our smallest retailers, hairdressers etc will find this a major challenge, especially with the other measures outlined above compounding their financial difficulties. They have also made it more expensive for these entrepreneurs to exit from their business. Changes to the rules on solvent liquidations mean that entrepreneurs' relief will no longer be available in these circumstances from April. Many business owners will now face a much higher capital gains tax liability on exit than they had planned for.

So let's go back to the original question put to a room full of small business people. What has the government ever done for them? Well, looking at the most recent changes, the answer would have to be, 'Not a great deal and they are making our lives a lot more difficult.'

The Government will point to the positive measures above and the difficult decisions they have had to take to stabilise the public finances. In my opinion, some of the burden is falling disproportionately on the smallest of small businesses. Some of these adverse measures will really start to bite this year and particularly in 2017/18 and I believe there will be a negative impact on business profits and investment in these businesses. By nature this group tend to be positive and resilient and not given to making a fuss. I believe the government should not take their goodwill for granted however and they are running the risk of alienating a cohort who should be their natural supporters.

www.base52.co.uk