Individuals and Directors are looking for ways to reduce their tax liabilities now more than ever, and we frequently advise clients on how to pay the least amount of tax possible. There are numerous tax tips that can be used because many people do not want to pay more than they have to. In this blog, we will provide tax tips to individuals and directors and help them reduce their tax liabilities.
Tax Tips for individuals
As an individual, you may be entitled to claim the following tax benefits –
The Marriage allowance (MA)
If you’re are married and have an income of less than £50,270 (2021/22), you may be entitled to claim the benefit of the marriage allowance. Under MA, one spouse can easily transfer 10% of their personal allowance. As per the tax year 2021/22, the personal allowance is £12,570, which means that one spouse can transfer £1,257 to the other. If you are a basic rate taxpayer, then an increase in the personal allowance by £1,257 will reduce your liability by £251 (as the income tax rate is 20% for basic rate taxpayers - £1,257 * 20%).
Read our blog on UK Tax Rates and Allowances for 2021/22
Form-17 or transfer of joint assets to a spouse or civil partner
Transfer income-yielding assets such as property to your spouse/civil partner if they pay tax at a lower rate. Consider splitting the income to your actual share of the ownership of an asset.
Personal Savings Allowance
The savings allowance was introduced in April 2016. Most taxpayers in the UK are not required to pay any tax on their interest income within the personal savings allowance. Entitlement to personal savings allowance is based on the level of taxable income. In the tax year 2021/2022:
|Tax slab||Personal savings allowance|
|No higher rate income||£1,000|
|Higher rate income but below additional rate income||£500|
|Additional Rate income||NIL|
As an individual, you are entitled to a tax-free dividend allowance of £2,000 per annum, which means you don’t have to pay any tax on the first £2,000 received as dividend income. Above this, you will need to pay tax based on your marginal rate of tax.
Personal contributions is one of the best ways to save taxes while saving money for your future. You can either make contributions through a net pay arrangement where your employer makes a direct contribution to your personal pension fund before deducting any tax and national insurance. The second is called ‘relief at source’, where you make personal contributions to the pension fund with basic rate tax deducted from the contribution and the refunds are added to your fund by HMRC after the pension scheme administrator makes a claim. You have to declare your pension contributions through a personal tax return, resulting in the tax band being raised. Thus, the income previously taxed at higher tax rates could now be taxed at a lower tax rate. This provides you with full income tax relief on your personal contribution.
Read our blog on Pensions Tax Relief
Gift aid donations
It is very similar to pension contributions. When you make charitable donations, you can sign up for Gift-aid. This helps the charity to seek a tax refund at the basic rate on the donation and increases the value of the donation. For example, if you have donated £100, the charity can make a claim for a gift-aid donation and receives an additional amount of £25 from HMRC, taking the total donation to £125. You can show the donations on your personal tax return and claim tax relief.
The key benefit of Gift Aid donations is that they can be carried back and treated as if they were made in the previous tax year.
Investing in shares of companies that are approved for either of these venture capitalist schemes can save you 50% or 30% in tax relief on your investments. The gains made on the disposal of these shares are free from Capital Gains Tax (CGT).
Capital gains annual exempt amount
For the tax year 2021/22, chargeable gains of up to £12,300 are free from Capital Gains Tax (CGT) for individuals and estates, whereas £6,150 for most of the trusts. Therefore, you could sell or gift assets to your children or other family members and provided the amount of your capital gains is less than £12,300; there will be no tax for you to pay.
You can also reduce, defer or save your taxes by deducting losses or claiming reliefs such as gift holdover relief, business asset disposal relief or rollover relief.
Also, private cars, and in many cases, chattels having a limited life span are exempt from CGT when sold.
You can also read our blog on Capital Gains Tax on Property
Inheritance tax – Lifetime allowances
Every individual has certain lifetime allowances that can be given without impacting their inheritance tax (IHT) bill -
- Gifts of up to £3,000 each year are free from IHT (In case you have not used the previous year allowance, you can use the same in the current year)
- You can also give gifts to individuals at their wedding
- £5,000 in case of a child and
- £2,500 in case of a great-grandchild or a grandchild
- £1,000 to any person
- You can also give gifts to your spouse or civil partners if you both live in the UK permanently (No limits between spouses on lifetime gifts)
- Normal gifts out of exemption – You can give this regularly as it doesn’t affect your standard of living - Normal birthday presents, regular Christmas gifts or fee paid to a grandchild out of the large monthly pension.
- Donations to charitable institutions or political parties
- Assistance with other living costs, e.g. an elderly relative
- Small gifts up to £250 per recipient per year
If you die within 7 years of making a gift that isnt tax-free at the time it was made, it might be subject to inheritance tax. Its a good idea to keep track of major gifts and loans, including the conditions and deductions that were used. Thus, tracking of major gifts and loans is highly recommended, including the terms and allowances being used.
Tax Tips for Company Directors
There are numerous ways for limited company directors to improve their tax position by reducing their taxes in the following manner -
Claim your tax-free benefits
Claiming tax-free benefits could reduce your taxes up to a certain level. Make sure that you use most of these tax-free benefits to save much of your tax –
- Mobile phone - Get the company to pay your phone costs directly. There is no taxable benefit to you personally if your employer provides you with a mobile phone. Ensure that the contract is in the name of the company and is paid directly from the business bank account. If your employer simply pays for your personal phone, it may become a taxable benefit.
- Home working - You can receive a £6 per week allowance from your employer as a contribution against your household expenses if you work from home. It might not seem to be much, butth is adds up to a reasonable amount over the course of a year.
- Annual staff party - You can host a celebration such as a Christmas party annually as a reward to celebrate you and your staff hard work for the entire year. You can even invite your partner to the party as well. The event budget must not exceed £150 per head (Including VAT).
Make an appropriate plan for your reward package
You must carefully plan your rewards package by considering salary, dividend, pension and life assurance options.
- Salary options - You are free to pay yourself a salary for your director duties. Taking a salary based on the existing personal tax allowance is one alternative. However, a small amount of both employee and employer national insurance contributions are due on this salary Or you can pay yourself a salary up to the employers Class 1 NIC limit of £8,840.
- Dividend - As a shareholder, you are entitled to a portion of the companys profits after tax, known as a dividend. Dividends have the advantage of not incurring National Insurance charges, unlike salaries. As a result, you can increase your personal earnings by receiving most of your income as a dividend. You would be able to choose when the dividend is paid, but the company must be successful enough to declare one.
- Pension - For retirement planning, you may wish to include pension payments in your compensation plan. Any contributions made by the company would be deemed an allowable business expense provided it’s wholly and exclusively for business purposes, thus reducing the Corporation Tax bill by 19 per cent (as per the tax year 2021-22). The current annual limit for pension contributions is £40,000
- Life assurance - You may consider including a life insurance policy in your rewards package. The company can pay tax-deductible premiums on a relevant Life Plan, a death-in-service life assurance policy for company directors. Under this policy, neither the premiums nor any pay-outs would be considered a taxable benefit to you.
Get the family involved
If you need assistance with specific business tasks and your family members possess the required skills, you should consider employing them, especially if they are not using their entire Personal Allowance. As long as the pay is reasonable and the tasks are relevant, it is an allowable business expense that will reduce your companys tax bill.
Tax-saving investment opportunities
Consider investing in ways that will save you money on taxes. If your company has a healthy retained profit balance, you may want to consider withdrawing some funds and investing in tax-advantaged investments such as the Enterprise Investment Scheme (EIS) or a Venture Capital Trust (VCT) Or you can pay into your Investment Savings Account (ISA), where the funds will grow tax-free.
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This article was correct at the date of publication. It is intended for general purposes only and does not constitute legal or professional advice. Independent professional advice should be sought before proceeding with any transaction.