2015-16 Year-end tax planning
Written by Ray Coman
Use the ISA allowance. Up to £15,240 can be saved tax free in an ISA. From 6 April there will be no tax on the first £500 of interest, or £1,000 of interest for basic rate taxpayers. Take into account maturity dates on bonds so as to minimise tax on savings income.
Consider increasing expenditure and building up work-in-progress prior to the year end. Corporation tax rates are unchanged in 2016/17. Therefore, lower profits this year will delay the due date for tax.
For taxpayers with an income (before deduction of pension) of £150,000, the annual allowance will be decreasing. In some case the allowance could be as low as £10,000.
A taxpayer can bring forward unused allowance for the preceding three tax years in determining the total amount of contributions that would obtain tax relief.
For contributions prior to 5 April 2016, allowances for tax years, 2014/15, 2013/14 and 2012/13 can all be taken into the calculation. The allowance is used up by both employer and employee contributions. The allowance was £50,000 for 2013/14 and 2014/15. It is £40,000 for the current tax year and 2014/15. A total of £180,000 of current year and brought forward allowance is available prior to 5 April 2016.
The rate of income tax on dividends prior to 6 April 2016 is 0% basic rate and 25% higher rate, whereas after 6 April is 7.5% basic rate and 32.5% higher rate.
However, from 2016/17 the first £5,000 of dividends is tax free. Review the effect of increasing dividend payments. It is not necessary to make the physical bank transfers prior to 5 April 2016. A person who is both shareholder and director can retrospectively declare a dividend. Therefore, if it turns out that the amount that a shareholder has withdrawn from the company is less than optimal for tax purrposes, it is possible to increase 2015/16 dividends with proposed dividend.
A dividend, however, is at least the amount that the shareholder has withdrawn from the company. Withdrawals are typically represented in the main by transfers from the company bank account to the owner’s personal bank account.
Profit extractions for the company should not exceed corporation tax. It is a requirement to have retained sufficient funds in the company bank account at the year end to cover corporation tax.
A further method for avoiding the new rates of dividend tax is to retain profits in the company to be withdrawn as capital when the company is struck off. The retained profit would then be taxed at 10%, even for a higher rate taxpayer. This however relies on the system that allows this option being the same in the future tax year in which the company is wound up.
It is also rarely practical to dispose of a company while still trading, and so the lower tax treatment would only emerge as an option when there is a substantial trading break. Another tax efficient method for extracting profit is via pension contributions.
The wear and tear allowance is due to be abolished from 6 April 2016. Consider delaying the purchase of replacement furniture until after 5 April.