Act by 5 April to save tax: Part 1
By Donald Drysdale for ICAS
5 February 2019
Practitioners may have hoped for a break now that their clients’ tax returns for 2017/18 have been submitted, but in this, the first of two articles, Donald Drysdale reminds them that 5 April is looming.
Tax planning season
For clients who are individuals, the annual tax return filing season has just passed. But whether you’re a tax specialist or a general practitioner, I suspect that planning to minimise your clients’ tax bills is never far from your mind.
Tax planning should be an all-year-round activity. However, the next couple of months may be crucial in helping keep your clients’ tax liabilities down by ensuring that appropriate steps are taken before the current fiscal year ends on 5 April.
While deadlines for certain claims and elections fall on 31 January, or on other specific dates, the default time limit for many is four years after the end of the fiscal year – so 5 April 2019 is the default time limit for 2014/15.
In this article, I’ll set out some planning points relating to income tax and national insurance contributions (NICs) and then look at pensions and various other tax-advantaged investments. In my next article, I’ll examine some capital tax aspects, before commenting on the ethics of tax planning.
Income tax
Where spouses or civil partners pay income tax at differing marginal rates, tax savings may often be achieved by transferring income-generating assets between them (though this is usually most effective when done early in the tax year) or, in the case of owner-managed businesses, by adjusting remuneration levels.
Remuneration to a spouse or civil partner should be commercially justifiable and paid within nine months after the business year end. It should meet national minimum wage requirements where applicable. Likewise, remuneration paid to teenage children should be justifiable and meet all legal requirements.
For any individual, particular savings may arise from planning that brings their adjusted net income below £150,000 (above which the additional rate of 45% applies, or in Scotland the top rate of 46%), or £100,000 (above which the personal allowance tapers away), or £50,000 (above which child benefit is clawed back).
Making best use of the £5,000 starting rate band for savings income may produce helpful tax savings in certain circumstances. Also, the personal savings allowance of £500 or £1,000 of each spouse or civil partner, and their dividend allowance of £2,000 (down sharply from £5,000 in 2017/18), should be used fully where possible.
The transferable marriage allowance, introduced from 2015/16 onwards, is one of the most confusing and under-claimed tax reliefs. It allows (in effect) the transfer of part of the personal allowance between spouses or civil partners where certain conditions are met. Some couples may be eligible to claim it now since its inception.
Benefits in kind arising from employment can attract high tax liabilities – especially those relating to the provision of a car and (even worse) fuel for private motoring. Such arrangements should be reviewed regularly to ensure that the tax is minimised.
National insurance contributions
In some cases where the proprietor’s spouse or civil partner is employed in a business, the remuneration may be pitched at a level which ensures that no NICs are payable but state pension entitlement is preserved.
Where circumstances justify the employment of the proprietor’s children under 21, no employer’s NICs are due unless pay exceeds £892 per week. The age limit for this is 25 in the case of relevant apprenticeships.
From 6 April 2019, termination payments where the first £30,000 is exempt from income tax will face a harsher NIC regime above that limit. Where such planning is feasible, it may be beneficial to bring forward certain termination payments to before 6 April.
The Government’s plan to abolish Class 2 NICs is a threat to self-employed people with low earnings, who may find it more difficult to qualify for state pension and other contributory benefits. Thankfully the abolition has been deferred until at least the end of this Parliament.
Pension planning
Subject to limits, relief is available at the employee’s or self-employed person’s marginal income tax rate on contributions to a registered pension scheme up to their relevant UK earnings. Where relief is given at source, contributions of up to £2,880 (equivalent to £3,600 gross) attract relief even if there are insufficient or no earnings.
Relief for pension contributions may be clawed back by the annual allowance charge (currently £40,000, but it may be tapered down to £10,000) or the lifetime allowance charge (£1.03 million, but higher for certain taxpayers). Unused annual allowance may be carried forward in some circumstances.
Registered pension schemes established by owner-managed companies, or by unincorporated owner-managed businesses, may prove very effective in providing long-term savings for a proprietor and their spouse or civil partner, possibly in addition to other employees.
Even for those with relatively straightforward affairs, a decision to defer claiming state pension can be useful. For every 9 weeks the pension is deferred, future payments of taxable pension increase by 1% – that’s around 5.8% for each full year of deferral.
Other tax-advantaged investments
The enterprise investment scheme (EIS) offers investors 30% income tax relief and certain capital gains tax (CGT) advantages on investing in qualifying equity in unlisted UK trading companies. From 2018/19 the limit has been raised, and the individual may now invest up to £2 million in a tax year, provided that anything above £1 million is invested in knowledge-intensive companies.
The seed enterprise investment scheme (SEIS) is a variant of EIS, offering investors 50% income tax relief and certain CGT advantages on investing up to £100,000 in a tax year in qualifying equity in small companies carrying on or preparing to carry on a new business.
For those investing up to £200,000 in a tax year in quoted venture capital trusts (VCTs), dividends are tax-free and disposals are CGT-free. Where new shares up to that limit are subscribed, the investor may claim 30% income tax relief.
Income tax and CGT reliefs are available for investments in qualifying social enterprises.
Share loss relief may be used to obtain income tax relief on an allowable loss on unquoted shares.
Individual savings accounts (ISAs) allow investments to be held free of income tax and CGT. A variety of ISAs is available, covering a range of investment risks from low (e.g. cash) to high (e.g. innovative finance products). To qualify for the maximum ISA subscription of £20,000 for 2018/19, this must be subscribed by 5 April 2019.
Investing in VCTs, EIS, SEIS, qualifying social enterprises, unquoted shares or ISAs can offer useful ways of sheltering tax liabilities but may involve significant investment risks. Tax advisers should beware not to exceed their remit by giving unauthorised investment advice.
To be continued in Part 2.
Article supplied by Taxing Words Ltd