Pre 5 April 2019 – common tax planning issues
The 5 April tax year-end is fast approaching, but you still have time to save tax. It’s also time to think about planning better for the next tax year.
Some of the most common areas to think about are set out below.
Company director shareholders – 2018/19 tax efficient salary and dividends
If you are an owner manager of a limited company, you have control over the remuneration you can draw from your company. This means you can take a tax-efficient mix of salary and dividends.
If you haven’t considered this yet for the 2018/19 tax year, you still have time to finalise the appropriate salary/dividends before 5 April.
The personal allowance for 2018/19 is £11,850.
If your company can claim the Employment Allowance for secondary Class 1 NI, you can pay yourself a salary of £11,850 to use up your personal allowance. This assumes you have no other taxable income which uses any of your personal allowance.
If you are the only employee of your company, the Employment Allowance is not available; you should take a salary up to the secondary NI threshold of £8,424.
If your company is a one-person company (i.e. you are the sole director shareholder), you could also consider whether appointing your spouse/civil partner as a director before 5 April, and paying them a salary up to their personal allowance, has tax advantages. This will only be the case, if they have no or income less that the £11,850 personal allowance.
Once you have finalised your 2018/19 salary, you can extract profits from your company by voting dividends. The decision on how much dividend income to take will depend on a number of factors, but taking dividends rather than salary or a bonus has tax advantages.
You need to be careful to ensure that you have sufficient cumulative profits to vote dividends (evidenced by management accounts).
You should also ensure that you complete the necessary legal paperwork.
Pension contributions
Those likely to pay higher rates of income tax should consider making additional pension contributions. Contributions should be paid (i.e. they should leave the bank account) within the tax year in order to claim tax relief.
There are of course limits to the amounts you can contribute to a pension each tax year – £40,000 in 2018/19, unless you have income over £150,000 in which case the allowance is reduced. You should always consider the availability of unused allowances from the previous three tax years.
You will also need to monitor the total pension fund value. The lifetime allowance in 2018/19 is £1.03m.
If you operate your business through a limited company, company pensions (e.g. SSAS pensions) are a tax efficient way of investing in your (and your family’s) future.
Other income, capital gains and allowances
For those taxpayers who are not controlling company owner managers, you should ensure that you are making the most of your income/capital gains tax allowances.
You may wish to consider disposing of assets which generate income and capital gains ahead of 5 April, to use up 2018/19 allowances.
It may be beneficial to defer selling assets until 2019/20, if you have already used your 2018/19 capital gains exemption. Also, consider selling assets standing at a loss, to reduce current year gains otherwise taxable.
And, of course, consider full use of your 2018/19 ISA allowances.
Savings income nil rate allowances
Basic rate (20%) and higher rate (40%) taxpayers have a savings income nil rate allowance of £1,000 and £500 respectively for 2018/19. Additional rate taxpayers (45% taxpayers) receive no savings income nil rate allowance.
This allowance means that interest income falling within these limits is tax free.
Savings income such as interest is usually outside the control of most taxpayers. However, owner managers of companies do have an opportunity to control the timing of interest payments to themselves, when they have lent money to their companies.
If a director shareholder of a limited company has loaned money to his/her company, they can charge interest on the loan. This is a tax-efficient way of extracting profit.
If taxable interest income from other sources has not used up the 2018/19 savings allowance, interest on a loan to your company will be tax free provided the interest does not exceed the £1,000/£500 threshold.
Moreover, the interest payable to you by the company will attract corporation tax relief (currently at 19%), as long as the interest rate is set a commercial rate and the loan is used in the business.
The loan doesn’t need to be a formal loan; it can be a director’s loan account credit balance.
Trivial benefits exemption
Employers are allowed to provide any number of tax-free small trivial benefits in kind to their employees.
HMRC has certain conditions which must be met to avoid this exemption being exploited.
For directors, the exemption is capped in total at £300 per tax year, with each benefit being capped at £50. This means that a director of a small limited company could claim up to six tax-free trivial benefits per tax year worth £50 or less.
You can still use this £300 exemption in 2018/19 even if you have not taken any trivial benefits to date.
If a spouse or civil partner of a director is also a director of the company, they are also entitled to a £300 exemption for 2018/19.
Make sure you check the rules to ensure you don’t make some of the common errors. For example, you can’t provide cash payments and it doesn’t apply to the payment of personal bills. But retail vouchers can qualify.
Married couples and civil partners
Spouses and civil partners are taxed as two separate people. Each spouse/partner is entitled to a personal allowance in 2018/19 of £11,850. Spouses and partners should ensure that, where possible, each spouse/partner uses their personal allowance, savings allowance and £2,000 dividend nil rate band.
Where spouses/partners jointly own income-generating assets (e.g. property), HMRC will assume that they are entitled to equal 50/50 shares. Spouses/partners can make a joint election to HMRC to specify actual beneficial interests. This election may be beneficial where one spouse/partner has a lower rate of tax than the other or has unused allowances.
Spouses/partners should consider the ‘marriage allowance’. This is where an individual can transfer a portion of their personal allowance to their spouse/civil partner in certain circumstances. In 2018/19, £1,190 can be transferred giving rise to an income tax reduction of £238.
The transfer can only be made to a basic rate taxpayer by a spouse/partner who has a low income below the personal allowance of £11,850.
Child benefit claimants, with income over £50,000
There is an income tax charge to recover child benefit, if the recipient or their partner has net income over £50,000. The effect of this is to recover child benefit from taxpayers who have higher incomes.
This income tax charge can be reduced or avoided by reducing net income below £50,000 by making pension contributions or charitable gift aid donations.
Where the charge cannot be avoided, it may be worth making an election to no longer receive Child Benefit, as this may remove the need to file a self-assessment tax return.
IHT
IHT is a big subject, which can’t be covered in detail here. However, some key points to consider before the end of the tax year:
- Use your £3,000 annual gift allowance. Any unused portion of this annual exemption can be carried forward for one year.
- Use the £250 small gifts to individual’s allowance.
- Gifts may be made of up to £1,000 for weddings, with £2,500 by grand-parents and £5,000 for parents.
- Regular gifts out of income are exempt from IHT.
- Make a gift now and in seven years, it falls out of the scope of IHT. This is known as a Potentially Exempt Transfer (PET). If a donor dies within seven years of making a PET gift, the PET will become chargeable to IHT.
A couple of general points on IHT:
- Review your will on a regular basis and especially when a significant life event occurs (e.g. marriage or divorce). When things change, there can be tax consequences.
- Understand current IHT allowances (e.g. the Nil rate band of £325,000 and the Residence Nil Rate Band currently £125,000). Take time to consider whether your estate on death could have an exposure to IHT. If so, you have options but you need to seek advice and take action.
The Spring Statement
The Spring Statement, as promised by the Chancellor, was not another Budget. There is no new tax legislation to consider – a relief for all, given Brexit and MTD for VAT etc.
Entrepreneurs’ Relief – Update on 2018 Budget Changes
The 2018 Budget included two significant announcements in respect of capital gains tax ER:
- The minimum qualifying period, during which the qualifying conditions for ER must be met, will increase from the current 12 months to 24 months (from 6 April 2019).
- For a person to qualify for ER on disposal of company shares, the company must be the individual’s ‘personal company’. For disposals after 29 October 2018, an individual must have a 5% interest in both profits and net assets of the company. This is in addition to the current requirement to be entitled to at least 5% of the ordinary shares and voting rights.
In respect of point 1 above, the qualifying period for ER doubles to two years from 6 April 2019. If you are currently negotiating a contract of sale and you may lose ER due to this change, you should ensure contracts are exchanged prior to 5 April 2019.
In respect of point 2, the changes announced in the Budget to the definition of a personal company appeared to prevent ER being available to those holding alphabet shares (e.g. Ordinary As, Ordinary Bs etc.). Each class of such shares has different rights, which results in uncertainty over the dividends and capital on winding up that each class is entitled to. The Budget change appeared to mean that the 5% interest in profits and capital test wouldn’t be met, and so ER wouldn’t be available to holders of such alphabet shares.
The Government has tabled an amendment to the Finance Bill, to deal with these concerns. This amendment keeps the original changes noted above, but it includes an alternative condition in the event that a shareholder can’t meet the new tests.
This alternative test states that the company will be a shareholder’s personal company (and therefore qualify for ER), if they would be entitled to at least 5% of the net proceeds of all the company’s share capital if it were sold.
This alternative condition deals with the issue of holding alphabet shares with ambiguous rights. However, the practical impact of this new condition is that a valuation of the company will be required every time such shares are sold, to demonstrate the 5% net proceeds test has been met.
MTD for VAT
The Financial Secretary to the Treasury made a recent statement to the House of Commons setting out HMRC’s progress on delivery of Making Tax Digital (MTD). He confirmed there would be no further delays in implementation.
For most businesses, compliance with the regulations is required for VAT return periods beginning on or after 1 April 2019. However, MTD for VAT for some ‘more complex’ businesses has been deferred until 1 October 2019.
EU digital services tax – plans abandoned
EU plans to introduce a digital services tax have been abandoned, after vetoes from Ireland, Denmark and Sweden. The EU have stated that it would be better to wait for a global agreement via the OECD.
The UK, France, Italy and Spain have already announced their own national digital services tax.
Disguised remuneration loan charge
If this applies to you, you will no doubt be aware that disguised remuneration loans taken out since 1999, which are not repaid or settled by 5 April 2019, will be subject to a ‘loan charge’ on 6 April 2019.
If impacted and you haven’t done so, you must act now – contact HMRC if you wish to settle, to avoid the loan charge.
Off-payroll working in the private sector
HMRC have opened a new consultation ‘Off-payroll working rules from April 2020’. This deals with the issue of extending the public sector off-payrolling rules to the private sector from 6 April 2020.
In the 2018 Budget, the Chancellor announced that the public sector off-payroll working rules, which were introduced from 6 April 2017, will apply to medium-sized and large businesses in the private sector from April 2020.
This means that medium-sized and large businesses, which engage individuals who work via a personal service company, will need to decide whether the new rules apply to the engagement.
Small companies will not be affected.
The consultation ends on 28 May 2019.
Advisory fuel rates from 1 March 2019
HMRC have published the latest Advisory Fuel Rates (AFRs), which take effect from 1 March 2019. You are allowed use the previous rates until 31 March 2019.
The latest rates can be found at:
https://www.gov.uk/government/publications/advisory-fuel-rates
These AFRs are the rates used to reimburse employees for business travel in their company cars. They are guideline rates and can be paid tax-free. They are based on the car’s engine size and fuel type.
AFRs can also be used if you are a VAT registered business claiming the VAT on the fuel portion of a mileage claim. This is relevant if you use your own car for business trips, and your business or employer claims VAT on your mileage expense claims.
Minimum wage increases
The National Minimum Wage (NMW) and National Living Wage (NLW) are the legal minimum wage rates that must be paid to employees. Employers are liable to be penalised for not complying with the NMW and NLW rules.
There are different levels of NMW and NLW, depending on age and whether the employee is an apprentice.
The rates are due to increase from 1 April 2019. Details can be found at:
https://www.gov.uk/national-minimum-wage-rates
Pensions auto-enrolment contribution rates
Currently (2018/19), the total minimum contributions are 5%, with the employer typically contributing 2% and the employee 3%.
From 6 April 2019, the total minimum contribution will increase to 8%, typically 3% employer and 5% employee.
Further details can be found at:
Brexit – no-deal planning
I hate to mention the dreaded ‘B word’! However, latest guidance from Government on no-deal planning can be found at:
Latest guidance on accounting for import VAT, if the UK leaves the EU without a deal can be found at:
https://www.gov.uk/guidance/accounting-for-import-vat
Repaying loans made to you from your company
If your company has made a loan to you and you are a controlling director shareholder, you should be aware that you should repay the loan within 9 months of the company year-end, if you want to avoid a 32.5% corporation tax charge.
Also, if the loan is over £10,000 and is interest-free, a taxable benefit in kind may arise on you, upon which income tax and NI will be payable.
Loans in this instance includes overdrawn director’s current account that is not repaid.
The issue of loans and overdrawn directors current accounts needs to be managed carefully, so tax is minimised for both the company and loan recipient.
If you would like to discuss any of the issues above, we can help. Please do get in touch for a no-obligation conversation.
Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. The Writer and Whyatt Accountancy accept no responsibility for any loss arising from any action taken or not taken by anyone using this material.