Year-End Tax Planning

With the approach of the tax year end it is worth considering the following areas regards tax planning.  

In particular this year, Company Directors are advised to consider the new Dividend Tax which will come into effect in April:

DIVIDEND TAX

From April 2016 the new dividend tax comes into effect with the 10% tax credit abolished to be replaced by £5k tax free dividend allowance followed by 7.5% basic rate, 32.5% higher rate and 38.1% additional rate. All dividend income will be treated at the top band of income available.

First off, it is important to do bespoke planning in this area for whilst we will present some useful rules of thumb individuals particular circumstances can affect decisions. That is said in general we are advising Company Directors to use up all available distributable profits in the tax bands they find themselves in.

Distributable profits refers to the fact that we cannot vote dividends if there is no profit after tax to distribute. The point about maximising dividends is that from 2016 dividends will be taxed more heavily and therefore it makes sense to bring forward dividends. The caveat about maximising dividends within tax bands is saying that there is no point maximising dividends if it takes you into a higher rate tax threshold.

Our final note on this is that bringing forward dividends will also affect cash-flow. Any tax due in 2015-16 will need to be paid to HMRC by Jan 2017 a year earlier than tax liabilities generated after Apr 2016.

PERSONAL ALLOWANCES AND TAX THRESHOLDS

Higher Rate tax (40%) starts at £42,385 at taxable income in 2016.   High Income Child Benefit Charge applies to earners over £50K per annum. At £100K income the £10,600 Personal Allowance is withdrawn and Additional Rate tax (45%) starts at £150K.

Delaying Income

Where an individual is reaching one of the tax thresholds for personal tax, it will be worth considering options for reducing income this year.  For Sole Traders or Partnerships this could involve delaying work until April. For Company Directors this could be achieved by delaying salary or dividends.

Bringing Forward Expenditure

For Sole Traders and Partnerships the same effect may be achieved by bringing forward expenditure, especially on tax deductible capital expenditure - eg IT, machinery etc.

Tax Reliefs

Tax thresholds are increased by Pension contributions and Gift Aid payments. Where individuals are Higher Rate earners, making payments to Pension and Gift Aid payments before the end of the tax year will decrease the 2015-16 tax bill within certain eligibility criteria.

OTHER

Savings - anyone making savings to ISAs may want to check they have used their allowances for the year.

Residential Property Landlords - new rules apply for substantial property refurbishments from Apr 2016 that generally are more advantageous to landlords. Anyone planning to make such refurbishments may wish to delay until after the end of the tax year.

Capital Gains - Gifts made between connected persons are treated as being made at market value. If you are wanting to make gifts to family members you may wish to plan this ahead of the end of the tax year with a view to using your personal allowance on Capital Gains of £11,100.