All UK taxpayers may benefit from pausing, taking a deep breath, and considering their planning options as we approach the run-up to yet another tax year end.
The prime areas for consideration are where income levels are threatening to break through into the higher rates of Income Tax. For 2016-17, these are:
- If your taxable income exceeds £32,000 (after deducting your £11,000 personal allowance) you will pay Income Tax on any excess at 40%.
- If your taxable income exceeds £150,000 you will pay Income Tax on any excess at 45%.
- And if your income is between £100,000 and £122,000 you will pay income tax at a marginal rate of up to 60%. This is due to the gradual loss of your personal allowance in this income band.
These tax rates are for general income – for dividends see Businesses below.
You could, for instance, consider:
- Increasing pension contributions
- Salary sacrifice opportunities before the rules change from April 2017
- Gift Aid donations
- Transferring income producing assets into joint ownership with your spouse
- Deferring bonus payments until after 5 April 2017, especially if your income for 2017-18 is planned to drop as compared to 2016-17.
Apart from these strategies, there are other legitimate planning opportunities you may be able to employ in order to minimise your exposure to the higher rates. The key is to take a hard look at the numbers before 5 April 2017.
For businesses with March 2017 year ends, it’s all about timing and an in-depth look at trading results for the first three quarters BEFORE the end of the tax year.
Items that could be considered are:
- The timing of capital acquisitions to maximise use and impact of tax allowances. For example, would it be more beneficial to delay the purchase of new plant until after March 2017, and claim against profits for 2017-18, when planned profitability is expected to increase, as compared to 2016-17? Or advance the purchase and thus tax relief?
- Deferring or bringing forward expenditure – this could include tax allowable refurbishments, maintenance to equipment and similar costs.
If your business is a company, consider retaining profits within it rather than extracting them as dividends in excess of the annual tax free allowance of £5,000. In this way you could retain cash in your business after paying 20% Corporation Tax, rather than creating an additional dividend tax charge (for dividends drawn in excess of £5,000) of between 7.5% (basic rate), 32.5% (higher rate), and 38.1% (additional rate).