An often overlooked part of putting your finances in order is making sure that your tax planning is effective. Are you claiming all the tax relief you’re entitled to? Are your investments arranged in the most tax efficient way?
To give your financial planning a head start, here are ten strategies for efficient tax planning in the year ahead.
1. First and foremost, be organised. Make sure that you submit your tax returns on time. The rules have changed and the full £100 penalty will now be due if your return is late, even if there is no tax outstanding. Make sure you submit your return by October 31st if it’s non-electronic, or by 31st January following the end of the tax year. In addition, make sure you keep good records. This may not seem very exciting, but HMRC are increasingly stressing the importance of accurate record keeping. Everything tax related – interest statements, dividend vouchers, payslips, P60’s and so on – needs to be kept. Your accountants will be happy even if you simply hand them a folder with everything in it: that’s far better than not having the relevant documentation.
2. Make full use of your personal allowances. The basic personal allowance for 2011/2012 is £7,475 and this can be used effectively if you and your spouse are both involved in running a business. Even if only one of you is involved, the other could be employed in order to use up his or her personal allowance.
3. There’s also nothing to stop children being employed in the family business so as to take advantage of their personal allowance. Remember though that payment must be for actual work carried out, and at a reasonable commercial rate. Your children also have their own annual exemption for Capital Gains Tax, so it may make sense to move some assets into their names, especially if the value of the assets is likely to increase.
4. The contributions which an employer makes to a pension scheme are generally tax and NI free for most employees. If you want to boost your pension, it may be worth considering ‘salary sacrifice’ – giving up some of your salary to increase your pension contributions. You’ll need to discuss this with your employer and you may need some specialist advice from an independent financial adviser, but it can be a very effective way of increasing the amount going into your pension.
5. If you are running a business, try and incur expenditure just before the end of your tax year rather than just after as this will speed up the tax relief. Examples of the type of expenditure you might consider bringing forward include repairs to buildings and plant, and advertising and marketing campaigns.
6. In most small companies the directors and the shareholders are one and the same, and so they can choose the most tax efficient way to pay themselves. Using dividends as opposed to salary can result in savings to NIC, but it does require some planning. Any good accountant or independent financial adviser will be able to explain all the options to you.
7. The current threshold for VAT registration is £73,000: it may be worth registering voluntarily if your turnover is below this, although registration obviously brings extra administrative responsibilities. When you first register for VAT you can reclaim input tax on goods purchased up to three years before registration, providing you still have them at the time of registration.
8. Remember that interest paid on bank and building society deposits will have tax deducted at 20%. If you do not pay tax then you can sign a form to have the interest paid without the deduction of tax. Alternatively, you can submit a repayment claim to HMRC.
9. When you’re choosing between different investments, it is the overall investment strategy that is the main consideration, not the tax position. You should make investments based on whether they are right for you and your financial planning: an investment strategy based purely on saving tax may do more harm than good.
10. Finally, the best strategy of all – and the best advice – is to work with your professional advisers on a consistent, long-term basis. They will be able to give you all the appropriate advice to make sure that your financial affairs are arranged in a way that is both tax efficient and right for your long-term financial planning. A regular review meeting with your accountant and/or your independent financial adviser is always time well spent.
As ever, if there is any aspect of your tax planning – or your wider financial planning – that you would like to discuss with us then please don’t hesitate to contact us.
Any information concerning the taxation treatment of a recommended investment or action is based on our understanding of current Inland Revenue law and practice. Taxation law may be subject to future change.