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What About The Tax Year End Only 1 Week Later?
With all the understandable concerns about the effect of Brexit on business, it’s easy to forget other things, such as the tax year ends only 1 week later.
At least we have some control as to what we might do before the tax year end!
Income Tax Thresholds - £50k and £100k
A relatively new phenomenon, these are crucially important to understand if you want to make sure you don’t pay more tax than you need to.
As a company business owner, you can choose the salary and dividends you take out of your company; profits and cash permitting! You are in control and you don’t need to cross these thresholds unless you do so with knowledge of the consequences.
For £50k up to £60k, your child benefit starts to get taken away for you or your partner. If your child benefit is an annual £1,752 and your income is £60k, you have to repay (or not claim) £1,752. This amounts to a further tax of 17.52% on top of your dividend tax in that bracket of 32.5%, just over 50% in total. This is expensive!
Similarly, if you need to take more than £60k and are closer to the £100k threshold, you may want to stay under the £100k threshold. After this, you start to lose your tax free personal allowance. For every £1 of dividend taken between £100k and £123,700, the effective dividend tax due is 48.75%, rather than 32.5%. For high earning employees the effective tax rate is 60%!
The Importance of Pension Contributions and Charitable Donations
The introduction of the above £50k and £100k thresholds has shown how important pension contributions and donations are to your financial health. Admittedly, you are parting with money so it does cost you, but perhaps not as much as you thought.
If you were thinking of paying more pension contributions or some donations, you might want to make sure you pay them at the optimal time to maximise your tax reliefs.
As a company owner, your pension contributions will probably need to be made as company contributions, so you’d need to focus on charitable donations or simply timing payments and dividends correctly.
As a high earning employee, say, on a salary of £110k, paying £8k into a pension scheme will save you £6k of income tax! This is 60% of £10k which is the £8k you paid, grossed up by the 20%, or £2k, paid direct by the government into your pension pot. Therefore, paying £8k into a pension, which you should benefit from one day, only really costs you £4k.
Take IFA advice before deciding when and where to invest, or you might want to use your employer’s scheme.
If you’re due to carry out any repairs soon, make sure they’re done before the 5 April 2019 so you can claim tax relief in this tax year.
Tax relief restrictions on loan interest continue to cause problems. It may be worth considering selling the property, particularly with further capital gains tax adverse changes coming in from April 2020, only just over a year away. As the property market is not as vibrant as it was, it may easily take a year to sell, so perhaps you should list it sooner rather than later. Subject to what you think might happen to house prices over this period, naturally!
Start Up Sole Trader?
If you were an employee in the tax year you started your business, or in any of the previous 3 tax years, you should be able to reclaim a PAYE refund, if you make a tax loss.
Many start ups make a tax loss in the first few years. If you have some costs to incur or equipment to buy in the next few months, you might want to incur these costs before 5 April 2019. This could increase your tax loss and therefore your tax refund. The meaning of ‘incur’ isn’t necessarily paying out cash before 5 April 2019, so check the rules if your cashflow is tight.
Remember to take appropriate professional advice before taking or refraining from any action.