With the end of the tax year fast approaching, now is the time to take action on any last minute tax savings opportunities. Much tax can be saved using some very straightforward and accessible tax planning, but it needs to be completed before 6 April 2016.

Firstly, ISAs are a fantastic way to save tax on savings income. The annual limit to be paid into an ISA currently £15,240 and this can be in shares, cash, or a combination of the two.  In addition to this, parents and grandparents (or anyone else) can pay into a tax-free junior ISA for a child up to a maximum of £4,080 every year.  The funds cannot be withdrawn until the child reaches 18 years old, and as such, a potential downside is that this cash is then tied up possibly long term.

In addition, significant tax savings can come from investing in small and growing businesses through schemes such as Enterprise Investment Scheme and Venture Capital Schemes. The tax savings available on such schemes is significant and depending on the level of investment you are looking to make, can be extremely attractive.

Another tax efficient investment is through making pension contributions. It is possible to invest £40,000 in a pension scheme in the current year and obtain tax relief (subject to level of earnings and lifetime allowance).  If you have not used your pension allowance in previous years it is also possible to use up to three years unused contributions from earlier years, so long as you were a member of the pension scheme.

Payments of pensions through salary sacrifice can be even more attractive where by you are earning over £100,000. This is because your personal allowance begins to be clawed back once your earnings are over this level by £1 for every £2 over £100,000.  Paying into a pension effectively lowers your gross earnings, and as such there is scope for more personal allowance being maintained. Likewise, for those earning between £50,000 and £60,000, child benefit is clawed back.  Again, paying into a pension can mean that some or all of your child benefit is preserved.

Declaring dividends in the current tax year could prove to be extremely tax efficient; especially as from 6 April 2016 the rate of tax on dividends is increasing. If you have not yet utilised your basic rate band of income tax, or even your higher rate band depending on future profit projections, now is the time to consider declaring dividends.

If you are planning on making a gift to charity, you might want to consider the timing of that gift in order to maximise the tax relief achieved. If you are a higher rate this tax year, but anticipate your next year’s earnings to fall, it would be much better from a taxation perspective to make the gift before 6 April 2016 as you will save tax at 40% rather than 20%.  Likewise, if you have a spouse who is in a different tax bracket, it might be worth considering who the gift is made from.

Looking to capital taxes, it is worth considering the timing of any disposals of assets, such as shares, you are planning on making. Every year, each individual gets an annual exemption (currently £11,100).  This means that the first £11,100 of gain made on a disposal is totally tax free. If you don’t use it in the current tax year, it is lost.  Therefore, if it is possible to make any disposal in two stages (one in the current tax year and one in the next), this is worth considering.  It is also worth considering that transfers between spouses are exempt for tax.  Therefore, again there is opportunity to utilise another annual exemption by splitting the asset between you and your spouse, and selling a quarter each this tax year and a quarter each next tax year.  This means that between you, you have an exempt gain of £44,400.

Inheritance tax (IHT) can also potentially be saved with a few simple tax planning opportunities. Usually, any gifts made within 7 years of death are potentially liable to IHT. However, each year it is possible to gift £3,000 without any IHT consequence, and cash is exempt from any capital gains tax. If a gift was not made in the prior tax year, this rises to £6,000.  Therefore, a couple could give up to £12,000 between them in one tax year to their children without suffering any tax.

If you would like further information about any of the above tax saving measures, both for the current tax year or the next, please get in touch – we would love to help!

 

More and more frequently, the news headlines contain reports of taxation schemes in a negative light. However, there are many tax reliefs advocated by HMRC in place for small companies which can be used to save tax through clear and authorised methods.

One such scheme is Research and Development (R&D) relief. This is an extremely attractive taxation relief which is available to many trading companies, subject to certain criteria, where research and development is conducted.  Many owners have heard of this, but few actually realise that costs which have been incurred are eligible for this relief.

There are various tests which are applied in determining whether a company has incurred any R&D expenditure. Crucially, R&D activity is distinguished by the test of whether there is presence of an appreciable element of innovation. If the activity departs from routine and breaks new ground it is likely to be included. However, if the activity follows an established pattern it is normally excluded.

If expenditure does qualify as R&D, and the company is eligible, the tax relief available is extremely generous. 230% of the total eligible expenditure is deductible for corporation tax purposes. In addition to this, if the company is loss making, the company can claim a tax credit immediately, thus improving cash flow.

Here at Frost Wiltshire, we can talk through the company expenditure with you and establish whether we believe the company is eligible for R&D relief. We can then complete and submit your claim for you, which will include a full report plus calculations.

We offer a range of services outside of R&D claims, and as such can take on all your business and personal compliance needs alongside this more specialist area if you would like us to.

Because we offer a range of services outside these claims, we are able to provide this service at a highly competitive price.

If you are interested, please contact Mel Hackney or Steve Wiltshire to arrange a free initial consultation.

 

Mel Hackney gives an overview of the forthcoming changes and why small business owners should be reviewing their remuneration strategy

From April 2016, the income tax rate of dividends is increasing. This means that if you are a shareholder and have adequate distributable reserves within your company, now is the time to consider declaring dividends in order to make your distributions as tax efficient as possible.

The tax rate of dividends at a basic rate level has been at an effective rate of 0% for a number of years. However, from April this year, this rate is increasing to 7.5% – still lower than the rate of tax applied to employment and self-employment income, but the effect is to make dividends less tax efficient than they were previously.

There are many tax efficient ways for a shareholder of a small business to extract profits without relying purely on drawing dividends, and if you think this is an area where you might need some guidance, we would be very happy to help. Please contact Mel or Steve to set up a meeting.

 

It has been a busy couple of months.

Over the summer we have moved into newly refurbished offices on the top floor of our existing premises in Chipping Sodbury, affording us more than double the space in light, bright and contemporary new surroundings. In particular, our dedicated meeting room will be a valuable asset providing improved privacy as we welcome our existing clients and prospective new ones to meet with us.

The familiar vibrant colour scheme is complemented by striking new furniture throughout, and the introduction of new technology is topped off by our trusted (but excellent) coffee machine.

The combination of inspiring new premises with the convenience and familiarity of our location in the beautiful market town of Chipping Sodbury should position us well to deliver outstanding service to our clients over the coming years.

 

There are a few key changes to the way in which property income will be taxed from April 2016 and April 2017.

The major change which will impact many landlords is a restriction of tax relief on interest in respect of let domestic property. Currently, it is possible to offset interest on a mortgage against rental income, as one of many allowable expenses.  This is set to change from April 2017.  From April 2017, tax relief on interest will be restricted so that by 2020, interest will receive a maximum tax relief of 20%.  Rather than the interest being treated as an allowable deduction when calculating net rental income, the loan interest will attract tax relief at 20%.

The change will be phased in from 2017/18 to 2020/21, and during these years, part of the interest will be treated as an allowable deduction (as currently is the case), and part will be given as a tax relief; ultimately finalising in 2020/21 with 100% of the interest given as a relief of 20% with no deduction from property income.

Property owners who are basic rate tax payers, or those who have a low level of interest in relation to borrowings, will not be significantly impacted by this change. However, those who are higher rate or additional rate payers will potentially see a fall in the relief which they are currently in receipt of, and as such an increase in their tax bill.

Those with significant property portfolios and/or with higher debt levels may need to consider their business model, and whether incorporation may be preferential. Other considerations may be paying off loans as far as possible, or – more significantly – selling up.

 

Other changes

From April 2016 the current availability of simplified expense deduction of wear and tear allowance will be removed, and landlords will only be able to deduct when they actually spend money. Again, this may lead to an increase to taxable property income, and will certainly warrant a need to keep hold of all receipts and records to ensure maximisation of relief.

On a more positive note, ‘Rent a Room’ relief is rising from £4,250 to £7,500. Simply put, ‘Rent a Room’ relief allows those renting a room in their home an immediate deduction, and this relatively sharp rise will potentially encourage further home owners to consider this scheme.  Note that B&B establishments are also able to benefit from this relief so long as the owners live in the property.

If you have a second property of a portfolio and would like to discuss the implications for you, please get in touch with Mel or Steve.

 

2015 has been an exciting year so far and, as we head into the autumn, we are delighted to welcome Sam Alford to the firm.

Sam joins us as Payroll Manager, and brings a wealth of experience in the payroll arena which will be invaluable in enabling Frost Wiltshire to deliver outstanding service to our growing portfolio of payroll clients, as they navigate the ever increasing complexities associated with PAYE, RTI and Auto Enrolment.

Steve Wiltshire was pleased to welcome Sam to the team, saying “We are thrilled to have Sam on board, and are confident that she quickly will feel at home here. Her deep knowledge of the payroll field will strengthen our offering and enable us to develop our client base.”

 

Starting your own business can be an exciting – but daunting – time. One of the first and most important decisions to make is how are you going to structure your business? The reason this decision is so important is that it has a variety of consequences – not only related to tax, but also from a legal and administrative perspective, and how your business will be perceived.

The main options to consider are whether to set up as a sole trader, a limited company, or a partnership. Each has benefits and drawbacks.  As a sole trader, there is significantly less of an administrative burden than setting up as a company.  However, as a sole trader you are taxed on profits as they arise through income tax (at 20%, 40% and 45% depending on your level of earnings).  You also have a class 2 and 4 National Insurance burden.

On the other hand, setting up as a company gives more flexibility over your personal taxation position, as you are personally liable to income tax on income from the company when it is extracted from the company, rather than as profits are earned by the company. There also tends to be more flexibility, and therefore potential available tax planning opportunities, when structured as a company, although these have been mitigated with the recent changes to dividend taxation rules.  The company will be liable to corporation tax as soon as profit is earned, but this is at a lower rate of 20% (and this is set to fall to 18% by 2020).

Legally, owning a company offers more protection over personal assets than setting up as a sole trader, as the company is a separate legal entity from the shareholder.

However, there is additional administrative cost and procedures to follow as a company, and any tax saving may not be sufficient to compensate for this additional burden. Also, changes to taxation over dividends from April 2016 reduces the taxation efficiencies of setting up as a company, which makes this a less attractive proposition than previously.

In addition, anti-avoidance legislation (IR35) means that under certain circumstances, profits made through a company will be targeted as ‘earned income’, which means any tax saving will potentially be lost. This is a particularly important area to assess thoroughly before deciding on the right structure for your business.

A third alternative is to set up as a partnership. More and more businesses are setting up as a Limited Liability Partnerships.  With this structure, profits earned are subject to income tax as they arise, but the liability of the individual partners is limited to the capital which they have put into the business (rather than their personal assets), in much the same way as for a company.

When choosing which type of business structure to use, another consideration might be the availability of loss relief. If it is anticipated that the business might be loss making in its early years, this could impact the selection decision.

Capital gains arising on any sale of the business in the future may also be taxed, depending on which structure is chosen.

Overall, this decision is complex, and each individual’s preferences, priorities and circumstances will impact the final outcome. Here at Frost Wiltshire, we can set out the options available to you and give you the information and advice which you need to make an informed decision on what suits you and your business best.

 

It is relatively commonplace for shareholders of owner managed businesses to extract their income from the business by taking a low salary (in order to benefit from the corporation tax deduction available on employment income, plus avoid national insurance by keeping the salary below the threshold for NIC) and then extract profit via dividends, which are taxed at a lower rate than employment income.

However, in July it was announced that the way and rate in which dividends are currently taxed will change, therefore making this current extraction policy obsolete and potentially tax-ineffective. This will come into effect from April 2016.

Dividend tax credits are being abolished. This is where dividends have previously been grossed up by 100/90 when included in the tax computation, but then a 10% deduction has been given.

In addition to this, a dividend allowance of £5,000 will be introduced.

Dividends will then be liable to tax at 7.5% in the basic rate bank, 32.5% in the higher rate bank and 38.1% in the additional rate band. This is compared to 0%, 25% and 30.56% in 2015/16.

As such, tax efficient profit extraction will need to be considered, potentially alongside planning on the overall structure of the business. Certainly, tax benefits of setting up a business as a company are now more questionable.  On the other hand, with corporation tax rates set to fall over the next few years (from 20% to 18% by 2020), this will be another factor to take into consideration.

 

Extraction of companies’ profits will frequently result in a tax charge and often National Insurance contributions (‘NICs’) being levied. As such, careful planning is crucial in order to keep tax burdens to a minimum.

The simplest extraction methods available to owner-managers are either paying additional salary (i.e. a ‘bonus’) or dividends.  Each option has its own pros and cons.

Paying a bonus is likely to generate a charge to National Insurance (both employee and employer). However, the bonus and employer National Insurance are tax deductible for the company.  A dividend is paid out of retained earnings, and therefore no such deduction for corporation tax purposes is allowable.  But there is no charge to National Insurance on the dividend, and dividends suffer income tax at a lower rate than employment income.

Director-shareholders may be able to benefit from other methods of extracting funds from their company which might be available, such as charging rent on property, interest on loans or, indeed, by taking a loan from the company.

Getting the company to make pension contributions on your behalf is often worth exploring. There are many other tax free benefits which are available to directors and other employees, such as a mobile phone. Whilst these are not a direct extraction of funds, they can lead to a reduction in personal expenditure and so are worth considering. Generally, company cars have become less appealing in recent years as the tax liability on cars is levied based on CO2 emissions. However, these should not be dismissed as, if a low emission car is purchased by the company, the director might have a low taxable benefit and as such a low tax charge on the receipt of this benefit. The company will receive capital allowances on the cost of the car too, a deduction for corporation tax purposes, the percentage of which depends again on the CO2 emissions of the car.

As well as considering the tax impact of the chosen profit extraction strategy, it is important not to lose sight of the commercial, legal or long term implications.

The comments made here constitute guidance only.  To discuss your personal circumstances and obtain a tailor made solution please contact us.