With the right tax planning advice, you can ensure that you don’t miss out on any opportunities to minimise your business and personal tax position, enabling you to keep more of what you earn.
There are many reliefs and allowances available which can help to reduce your tax liabilities, however, without guidance, it can be difficult to know where to start.
Reducing Corporation Tax
Corporation Tax is the tax paid on the profits a company makes and is a significant expenditure for limited companies. There are a variety of tax reliefs available, including Research and Development Tax Credits (R&D) for qualifying companies involved in any research and development activities. Many businesses are unaware that they qualify for this tax credit so it’s worth checking the criteria. Successful applications can equate to a tax rebate of 33p in every pound spent on a project that has led to the creation of new processes, services or products, or in cases where you have modified an existing process, service or product.
At Thompson Wright, we dealt with R&D claims to the value of £849,895 last year, which increased significantly from 2018’s total of £436,001.
Capital Allowances can provide significant Corporation Tax savings for businesses. Capital Allowances can be claimed when your business purchases ‘assets’ that you use in your business, such as machinery, office equipment and vehicles.
One such example of this is the Annual Investment Allowance (AIA), which has been temporarily increased to £1 million between January 2019 and December 2020.
This is advantageous to businesses and it would be prudent to consider bringing forward any planned purchases of machinery, vehicles or equipment before December 2020 to take advantage of the increased allowance.
Personal tax planning
There are a number of reliefs and allowances available in relation to personal tax, which can be applied to Capital Gains Tax (CGT), Inheritance Tax (IHT) and business tax.
The Residence Nil-Rate Band (RNRB) provides an additional tax-free allowance for those who gift their home to relatives, or by leaving money to charity after your death, which is exempt from IHT. When drafting your Will, it’s important to plan for and consider the impact of any IHT liabilities.
The personal allowance is the amount of income that each individual is entitled to receive free of tax each year, which for 2019/20 is £12,500. In addition to this, there is also the Marriage Personal Allowance, which allows those who are married or in a civil partnership to transfer £1,250 of your personal allowance to your spouse or civil partner if they earn more than you. However, a transfer is not permitted if either partner pays tax a rate above the basic rate of 20 per cent.
It’s also important to be aware of certain tax charges, such as the high-income child benefit charge. This is in situations where your income is more than £60,000, and you or your partner receive child benefit, which will then mean that you are subject to a tax charge to recover the full amount of the benefit.
If your income is between £50,000 and £60,000 then the tax charge will equate to one per cent of the child benefit for every £100 of income above £50,000. You can mitigate this charge by choosing to stop receiving the child benefit, although it must be noted that if you stop claiming while not working then this can affect your state pension entitlement.
Capital Gains Tax (CGT)
Individuals are entitled to a CGT allowance of £12,000 for the 2019/20 tax year, which reduces to £6,000 for trustees. There are also several reliefs available which can be applied in relation to the disposal of chargeable assets to reduce your CGT bill;
- Entrepreneurs’ relief (‘ER’) in relation to qualifying disposals of business assets. Chargeable gains that qualify for ER are taxed at 10 per cent rate of CGT (up to a £10 million lifetime allowance of qualifying gains). Whilst trustees do not qualify for ER, they can utilise the ER lifetime allowance of qualifying beneficiaries in certain instances
- VCT/EIS and SEIS relief are Government initiatives offering significant income tax relief for investing in the shares of small companies, but they also benefit from being free of CGT on any profits made on the investment once the shares have been sold
- Main residence relief, which can exempt all or part of a chargeable gain arising on the disposal of a residential property which has been used as the taxpayer’s only and / or main residence during their period of ownership
- Gift relief, which can apply in respect of certain gifts and can defer the CGT charge on the chargeable gain until the transferee’s subsequent disposal of the asset
- Rollover relief, which can apply to ‘rollover’ chargeable gains on the acquisition of certain business assets within a set timeframe.
Other things to consider…
There are many other tax planning ideas to consider, including deferring income. This is a key aspect of tax planning if the accounting rules accommodate it legally and means that businesses can increase and reduce the amount of Corporation Tax that they are liable for by either delaying or accelerating the receipt of revenue or any expenses until a future tax year.
There is also the opportunity to change your company’s year-end point, meaning that your financial year will run for either more or less than 12 months, with specific accounting rules to follow if you proceed with this.
How can Thompson Wright help?
It’s essential to ensure that you seek expert advice before making any tax planning decisions. Our team at Thompson Wright are experts and will advise you on all of your available tax reliefs and allowances.
Contact our expert team today for a free, no-obligation meeting to see how you and your business can plan your tax future effectively and efficiently.