It’s only natural to want to take home at least a little more income year on year, and “pay-rises” of whatever kind are always welcome when contracts are renegotiated or the business profit exceeds that of the prior year. However, independently of increasing your income, fine tuning your financial position by ensuring you are maximising all known tax-breaks, can often leave a little more in your back pocket, with no extra work.
Tax planning is complex, but some things are simple
Tax planning, on the whole, can be complex. It’s quite often bespoke to the individual, and rules change frequently so it can be difficult to keep track year-on-year.
There are however, a number of basic tips that can be applied by almost everyone and most of which apply each and every year too.
Shelter your income, where possible
ISA’s are a great example, as interest earned on savings held in an ISA, are tax-free, meaning you get to keep more of the money you squirrel away for your new home, dream holiday, or the new gadget you have had your eye on.
From April 2016, the Annual Savings Allowance has also been introduced, where up to £1,000 * can be saved in any savings account without triggering tax on the interest.
The ISA limit for 16/17 is £15,240, meaning in total you can save up to £16,240 * tax-free this year.
*Basic rate taxpayers £1,000, Higher rate taxpayers £500
Steer clear of higher rate tax for longer, with a pension
Paying into a personal pension, helps you to avoid paying higher rate tax for longer. This is because the threshold between basic rate and higher rate tax is widened with the amount of pension contributions made within the tax year.
Maximising the contributions you make to your pension each year can therefore save you (currently) 20% in tax, and, at the same time, make productive steps towards saving for your retirement.
Generally speaking, invest in your pension whatever you can afford, as it is a tax-efficient retirement planning method.
The personal allowance (PA) for 16/17 is £11,000, and utilising this where possible is key. Two points here.
Firstly, the Marriage Allowance was introduced last year, whereby the lower earning spouse or civil partner can transfer up to £1,100 of their PA each year to the higher-earner. This benefit is worth up to £220.
Secondly, if the lower earner can help with admin tasks for the higher-earner, such as liaising with the accountant, banking and taking telephone calls, to a level where you can justify paying them a small salary, this reduces your taxable profit at the same time keeping money in the household. This is particularly useful if one partner isn’t utilising all or any of their PA.
Whatever your trading status, you should focus on claiming as much tax-relief as possible. Less tax to pay means more money stays in your bank.
Using a good cloud accounting software can really help to keep track of all your expenses, and enable you to reconcile your bank account balance easily on a regular basis, access your financial data from anywhere, and even take photos of receipts using your phone, so things are less likely to be missed.
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An accountant can also help ensure you haven’t missed anything come the the month, quarter or year-end. They can review and check all expenses have been claimed for, which reduced your profits legitimately.
A salary sacrifice scheme works if you are employed, however, if you are a director of your own limited company, you are essentially both the employee and the employer.
Salary sacrifice is where an employee is remunerated by an alternative to cash, common examples are gym membership, parking vouchers, childcare vouchers and pension contributions.
Taking dividends over the basic rate threshold results in more tax at a higher rate. So pay rises and bonuses year on year can sometimes get absorbed with extra tax. However, take the bonus in the form of say, pension contributions, means your retirement fund gets a boost and you pay less tax in the long term.
There may be an invoice from HMRC on it’s way to you in July with your second payment on account.
By completing your self assessment tax return before July, there may be the option to reduce your POA, if your profits have gone down since last year.
If so, the money stays with you and you can perhaps even invest it wisely and earn a little return.