February is a great time to look at tax planning for both you and your company, as it gives us time to plan ahead and implement measures that save you tax. Most of us don’t mind paying our taxes, but we also don’t want to pay more than we are required to, so here are a few things we can do to help:
Pension contributions: If your company makes contributions into your personal pension, these contributions will reduce the corporation tax bill as they are an allowable deduction from the profits. You can pay up to £40,000 a year into your pension as long as your income is no more than £110,000 per year. If you earn more than this, the amount you can pay in reduces gradually, down to a minimum of £10,000 per year.
Don’t forget, if you haven’t used your previous three-years’ pension allowances, you will be able to make a larger contribution into your pension.
Capital allowances: The annual investment allowance up to 31 December 2018 was £200,000 for the year. This means any equipment like machinery, computers, and fixtures and fittings, purchased by the company can be offset in full against your profits in the year. It’s worth mentioning that this doesn’t include company cars.
From 1 January 2019, the allowance was increased even further to £1 million per year. So if your business needs any new equipment, it may be better to buy it before the company’s year-end (assuming you’ve not used up the allowance already) so you can offset the cost against this year’s tax bill, rather than having to wait another 12 months.
Employing your partner: You can make your partner a director in or employee of the business, assuming that of course, they actually do some work for it – they may already do your administration, for example, as a labour of love. If you pay them a wage, they won’t pay tax on it if they earn less than £11,850 this tax year (there’ll be a little NI), but your taxable profits will be reduced. If they are genuinely doing the work then it is fair for you to pay them the going rate for it. Paying them £116 a week or more also allows them to accrue a qualifying year on their National Insurance record for their state pension.
Employing your children: You can do the same with your children if they are 13 or over – at that age they may want to earn their own money, and you might as well give them an introduction to the world of work where you know they are being looked after.
The amount that you pay them still needs to be a commercial decision and a sensible level for the work that they have done. It is also important to know that children are only allowed to work a certain number of hours per week depending on their age.
As an individual:
Pension contributions: This year you will start paying higher rate tax when you earn over £46,350. You can extend this amount by making payments into your personal pension out of your net pay. For every £800 you pay into your pension, your pot will receive £1,000 as basic rate tax relief can be claimed. The point when you start to pay higher rate tax is extended by the full £1,000 as well, meaning more of your income will be taxed at a lower rate and saving you tax.
Charitable donations: Gift aid donations extend when you start paying higher rate tax in the same way as pension contributions do, except there is no maximum payment amount.
Sharing income generating assets: When assets are held jointly by a couple, any income generated from them is generally split equally. This includes things such as rental income from property, or interest earned on your savings. You may want to consider transferring any assets you hold in your own name into joint names with your spouse. Most transfers between spouses don’t attract any tax payments either.
Before going ahead with any of these changes, please do get in touch with either Mark Morris or myself, we’ll be happy to help.