Tax Efficiency – What do I need to consider before the end of the tax year?

Tax Efficiency

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It’s always better if you can plan ahead and not leave things until the last minute. This principle is no different when planning to be as tax efficient as possible. Everyone is finding the living cost increases difficult so make sure you are making the best use of any efficiencies available to you.

The end of the 23/24 tax year (5/4/24) isn’t that far away so I advise you to start planning now. Having a plan now will affect both this year and future ones.

As a business owner you need to consider how your renumeration from your business affects your tax situation; especially if you have other income.

Are you a Higher Rate Taxpayer?

Remember to include all your income. Have a think of every single type of income you receive.  This could include:

  • Employed income
  • Self Employed income
  • Rental income
  • Airbnb rental income
  • Partnership income
  • Pension(s)
  • Dividends
  • Interest received

Total it all up and look at the rates below to work out which band you fall into before you start looking at how to become more tax efficient.

Income Tax rates and bands

Band

Taxable income

Tax rate

Personal Allowance

Up to £12,570

0%

Basic rate

£12,571 to £50,270

20%

Higher rate

£50,271 to £125,140

40%

Additional rate

over £125,140

45%

If you earn over £120k, your personal allowance is reduced by £1 for every £2 you earn over £100k.  Therefore, if your taxable income is £120k, your personal allowance will be reduced to £2,570.

Here’s how you work it out:

Personal allowance = £12,570

£120k-£100k = £20k (on £120k, you receive £20k over £100k)

Personal allowance reduced by £1 for every £2 over £100k = (20,000/2) x 1 = £10k

Personal allowance if your income is £120k = £12,570 – £10,000 = £2,570

You do not get a Personal Allowance on taxable income over £125,140.

When you look at this table you can see why it’s important to do some planning now – otherwise you could lose a significant amount of your salary in tax. But don’t be blinkered and only look at maximising how you become more tax efficient – remember your own financial goals. It’s another opportunity to consider how you can change things to help you get to where you want to be.

Items to take account of

Marriage Allowance

Remember the marriage allowance, if applicable. If one of you doesn’t earn enough to use up all of their allowance, then 10% of their personal allowance can be transferred over to the other spouse. However; you can’t transfer to your spouse if they’re a higher rate tax payer.

 

Payments on invoice

The total tax due is made up of two elements:

A settling-up payment for the previous tax year.

A payment on account, which is 50% of your estimated current year tax bill.

If you think your profits for 24/25 are likely to be lower than 23/24, you can ask for it to be reduced prior to submitting your tax return.

 

Interest Received

As a basic rate taxpayer, you can earn £1,000 of savings interest per year tax free.  For higher rate taxpayers, this decreases to £500.

 

Dividend Income

If you receive any dividends on shares that you own, then be aware that there is a tax-free dividend allowance of £1,000 (£500 in 24/25).

Basic rate taxpayers pay tax at 8.75% on dividends.

Higher rate taxpayers pay tax at 33.75% on dividends.

 

Child benefit and earning more than £50k

A few of my clients have hit this level this year so plan ahead. Can you take less dividends out of your company and transfer these into your pension instead. This will lead to a twofold gain – not hitting £50k on your tax return and decreasing your corporation tax.

Here are the steps you need to take:

  • Check your annual income on your P60 or your personal tax account.
  • Include any taxable benefits, for example, medical insurance, company car or accommodation.

How you can reduce your taxable income to be more tax efficient

As a business owner

It’s important to check that you are doing everything you can to be as tax efficient as possible.

  • Should you employ your spouse? Do they help you in your business?
  • Do you need to buy any equipment? If so it’s a good idea as a soletrader to buy it before the end of the tax year so that you receive the Annual Investment Allowance (AIA) immediately.
  • Would accounting software help you to keep on top of things and to know how many dividends you’ve taken out of the business?
  • Do you regularly review your directors’ loan account to check it’s not overdrawn. Remember as a director of a limited company, if this is not repaid 9 months after your company year-end you’ll have to pay tax on it at 33.75%.
  • If you would like to make any pension contributions they need to be made before 5/4/24 to be offset against 23/24 income.
  • The capital gains tax threshold is decreasing to £3k from April 2024 (previously £6k) so it’s a good idea to make any capital gains sales before this time.

 

As an individual

There are several ways that you can be more tax efficient by reducing your taxable income, which include:

  • Pension
  • ISA
  • Gift aid
  • Salary sacrifice

Pensions

Saving money into a pension reduces your salary for income tax purposes. The contribution limit for the 23/24 tax year is 100% of your annual earnings or £60k – whichever is lower. Remember this £60k includes contributions made by you and your employer.

Tax relief is paid at the same rate you pay income tax.

For example:

A 20% tax payer would only need to pay £8k into a pension to make a £10k pension contribution.

The disadvantage of making pension contributions is that your money is tied up until the age of 55.  This will be something else you will need to take account of when you are planning.

ISAs

If you invest in a Stocks & Shares ISA (Individual Savings Account), all of the capital gains, dividend income and interest are tax free.  The ISA allowance is £20k per person.  When you have used up your own allowance you could deposit money into a Junior ISA – the allowance is £9k per annum. But take care as on the child’s 18th birthday, all of the money in the Junior ISA becomes theirs!

Gift Aid

Donating through Gift Aid enables the charity to claim an extra 25p for every £1 donated.

For example:

Donating £100 means the charity can claim 25%, which will increase the donation to £125.

It is also beneficial for you if you’re a higher rate taxpayer as you can claim back the difference between your tax rate (40-45%) and the basic rate (20%).

Using the £100 example:

You can reclaim 20% of £125 (40%-20% = 20%) and thereby reduce your tax bill by £25.

Salary sacrifice

This is a possibility if your employer offers a salary sacrifice pension scheme.

Here are some advantages:

  • Your salary sacrifice won’t be subject to income tax or national insurance contribution payments.
  • Your employer might continue to pay their national insurance contributions in full, with the element linked to your salary sacrifice also going towards your pension.

Going back to the personal allowance table, if you can reduce your salary in this way then you may be able to retain your personal allowance or at least some of it and then you may enter a lower tax bracket.

Of course, the downside of this is that you will have less money to live off so you will need to check that you can afford it!

As you can see, there are things that you can do to reduce the tax you pay, whether you’re a soletrader or a Director of a limited company. The key to being as tax efficient as possible is getting a plan in place now.

A word of caution – if you are deciding to look into making tax efficiencies, I would always recommend speaking to a Financial Planner.  They will be able to advise you on whether you are currently doing as much as you can. Good luck!

Anna Goodwin @2024 All Rights Reserved.

www.annagoodwinaccountancy.co.uk