The end of the tax year cometh – what should you do before 5th April?

The tax year ends on 5th April. If you are self-employed, in partnership or a limited company the financial year runs to 31st March, is there anything you can or should do to help reduce your tax liability?

Something to bear in mind – outside of retail and hospitality, many businesses have managed to continue to generate some profits. Some businesses have been bolstered by the government support measures and will, in fact, report better profits than expected.

If this is the case and your business has some cash funds available to spend, there are certain things you should consider ahead of 5th April to help mitigate your tax exposure.

Pension Planning

• Maximise your pension

• Pension contributions are one of the first areas to look at. With an annual allowance of up to £40,000 each and tax relief of 20% – 45% depending on your overall circumstances, making a payment to your pension scheme is very worthwhile. Pension contributions can also help individuals avoid the Higher Income Child Benefit Charge (if your profits exceed £50,000) or regain some Personal Allowance (if your income exceeds £100,000).

• Use up your ‘Carry Forward’ of unused annual pension allowances

• The pension rules on ‘Carry Forward’ mean that any unused annual allowance from the previous three tax-years can be rolled into the current year, with the potential to pay up to £160,000 in one contribution. This is particularly useful for business owners with high profits and available cash looking to protect profits from tax.

• Pensions for children and grandchildren

• All UK residents, including children, can benefit from annual pension contributions of up to £3,600 (£2,880 net) regardless of earnings. This is a very tax efficient way of giving kids and grandkids a helping hand for the future.

Investments

• Make use of your Capital Gains allowance
• Every UK resident has an annual exemption of £12,300 for capital gains purposes. This means that a married couple can dispose of jointly held assets before 5th April and generate a net gain of £24,600 without paying any tax at all. This may include gifting or transfer of asset ownership at deemed market value. Advice should be taken before selling any particular asset and get a calculation done beforehand.

• Put funds into tax efficient savings and investment

• Everyone has an annual ISA allowance of £20,000 each. Putting money into an ISA now allows the capital to earn tax-free income and dividends in the future.

• For tax year 2020/21 £9,000 can now be invested each year into a Junior ISA or Child Trust for any child under the age of 18. These offer very tax efficient savings for kids and grandkids.

Extracting funds from your own company

• Paying family members

• If family members carry out work in your business, make sure they are being paid according to the work they are carrying out, especially if they have unused tax allowances.

• Use your dividend allowance

• If you own shares in your own company, you may be able to pay yourself some dividends before the end of the year. Make sure your company is profitable though as it is illegal to pay a dividend if there are no profits from which to pay it. Don’t forget to take off corporation tax first from your profits before checking how much is left for dividends. Taxpayers have a £2,000 dividend allowance each. This helps provide a little bit of tax free income for owner-managed company directors in particular. If your spouse is actively involved in the business and has a vested interest in its performance, consider shares for your spouse too with dividends payable.

• Pay a bonus

• You may want to consider paying yourself and other directors a one-off bonus. The catch is that the bonus will be subject to PAYE and NIC (for employee and employer). The bonus must be paid before the end of your financial year and included on payroll. It does help reduce corporation tax but can be costly, so take advice first.

Spending business money wisely

• Make use of 100% capital allowances

• If your business has some excess funds and needs to upgrade some plant/equipment, then now might be a good time to buy what you need. Things like new computer systems, commercial vans, heavy plant and office equipment will attract the 100% write-off against your profits.
• Make sure you have budgeted for the spending first, don’t leave your business short of cash or buy something you don’t need just for the sake of it!

• Carry out some qualifying research and development activities

• The key word here is qualifying – and this close to your year end will restrict how much tax relief you will get. Nonetheless, R&D tax relief is one of the most attractive and lucrative tax reliefs available to limited companies. Talk to your advisor now if you think you may be able to do something that might qualify as Research and/or Development work.

As always, time is of the essence and you should take professional advice before actioning any of the points above. 

Talk to us now if you’d like to discuss your options further.