Avoid hitting critical ‘income thresholds’
There are four fundamental income thresholds to avoid:
- £46,350. At this level of income the higher rate of tax kicks in: earnings and other income are taxed at 40%, dividends are taxed at 32.5% and the tax-free interest allowance drops to £500.
- £50,000. At this level of income child benefit becomes repayable.
- £100,000. At this level of income the personal allowance starts to be withdrawn. It is withdrawn in full once income reaches £123,700.
- £150,000. At this level of income the top rate of tax kicks in: earnings and other income are taxed at 45%, dividends are taxed at £38.1% and the tax-free interest allowance is withdrawn.
It is worth reviewing your likely income for 2018/19 and if you are likely to be close to exceeding one of these thresholds taking action to reduce your taxable income.
This could be achieved by making or increasing pension contributions, making gift aid donations, or if you are a sole trader by making tax deductible expenses through your business.
Transferable Married Couples Allowance
If you or your spouse earns less than the personal allowance whilst the other is a basic rate taxpayer, look at making a claim for transferable married couples allowance.
This enables you to transfer part of the personal allowance from one spouse to the other and is worth £237 for 2018/19. Claims can be backdated up to four years and worth up to £900 in total.
For more information about this please see my blog.
Tax-free dividend allowance
If you are a director/shareholder of your own company, make sure you at least use your tax-free dividend allowance of £2,000 for 2018/19.
You could also consider making your spouse or other trusted family members shareholders to make use of their tax-free dividend allowance.
Bear in mind that dividends are not tax deductible for the company.
Tax-free interest
Directors who have lent money to their limited company should also consider taking an interest payment from the company.
Basic rate taxpayers can receive interest of £1,000 tax free, and higher rate taxpayers can receive interest of £500 tax free, and this includes interest received from your own company.
The company will have to deduct tax from the interest and pay it over to HMRC to be reclaimed by the individual and there is some paperwork to complete.
This interest is tax deductible for the company.
Invest in your business
If you are a sole trader or partner in a business with a 31st March year end and are considering investing in plant, vehicles or equipment you might like to consider making this investment before rather than after the year end in order to claim capital allowances and accelerate the tax relief.
Most capital investment (other than property and cars) will attract 100% tax relief.
This is worth bearing in mind at the end of your business accounting year, whenever this may be, not just at the end of the tax year.
Use your capital gains tax annual exemption
Every individual has a capital gains tax annual exemption, which allows you to make tax-free capital gains up to £11,700 in 2018/19 before capital gains tax becomes payable.
Although bed-and-breakfasting rules prevent you from selling shares to realise a gain and immediately re-purchasing them, you can legitimately sell your shares to realise a gain with your spouse then repurchasing them: you have realised your gain tax free and your spouse has re-acquired them at a higher base cost.
Your spouse could gift these back to you at some point, or sell them herself at a future date with that higher base cost reducing the future tax payable.
Maximise your pension contributions
Regardless of your earnings level, everyone can make pension contributions of £3,600 each year. For a private pension you would contribute up to £2,880 and then up to £720 would be added as tax relief.
You can contribute up to 100% of your pensionable earnings for 2018/19, or up to £40,000 if lower. There are also options to carry forward unused pension contributions from the previous three years. Take care not to exceed your annual and lifetime allowance as there are penalties for doing so.
Making pension contributions has the added benefit of reducing your taxable income if you need to avoid exceeding those income thresholds.
If you are a company director then the company could make pension contributions on your behalf as part of your overall remuneration package. These contributions would be tax deductible for the company but a tax free benefit for you.
Use your ISA limits
Make use of ISA limits where possible. The ISA allowance for 2018/19 is a generous £20,000 for a combination of cash and stocks & shares. The Junior ISA or Child Trust Fund allowance for 2018/19 is £4,260.
