Income Tax Planning

For tax year 2020/21, personal allowance for individuals is £12,500 and the next £37,500 is taxed at the basic rate of 20%. Higher rate tax is charged from income of £50,001 to £150,000. Income above £150,000 is chargeable at 45%. Dividend income in these bands is charged at the rates of 7.5%, 32.5% and 38.1% respectively. It is a very sensible approach to look at your current earnings to see which bracket you will fall within in order to plan for resulting tax liabilities, ideas to reduce your tax liabilities:

• use the dividend allowance of £2,000 by paying dividend from your own company (if applicable)
• spouses and civil partners should seek to equalise income and utilise their personal allowances and basic rate tax bands, where legally possible.
• tax planning for residential property finance charge impact as there is no deduction allowed for 2020-21 while calculating your rental profits, which can push you into higher rate brackets and affect child benefit charge if applicable
• make pensions contributions up to £40,000 per year and utilise any unused allowances from the previous 3 years but beware of the anti-forestalling rules for high earners
• utilise the £3,600 pension limit for non-earners/children
• consider making gift aid payments to attract tax relief at the higher tax rate
• utilise ISA limits for all family members (including children)
• consider Lifetime ISA (LISA) for any children who are above the age of 18 now to get a maximum bonus of £1,000 per year.
• consider EIS and VCT investments – the investments are, by nature, higher risk but the tax breaks are generous but professional advice needs to be taken before investing in these.
• make use of starting rate of savings by paying interest from your own company on your credit director loan account (be vigilant regarding CT61 tax deduction requirements for company though). The personal savings allowance entitles basic rate taxpayers to £1,000 of tax-free savings income and higher rate taxpayers £500. Additional rate taxpayers receive no allowance.

Incorporated businesses

As announced on 12 November 2020, Annual Investment Allowance (AIA) has been maintained to the level of £1m until 1 January 2022 (which was originally due to revert to £200,000 on 1 January 2021). Bring forward the capital investments if needed, to boost the cash flow by claiming AIA.

• Electric cars – no further change on what I reported last year but still a very tax efficient way of putting a vehicle through the business – if you are considering purchasing an electric car feel free to contacting me to go through the different methods of purchasing it.
• Accelerate directors’ and staff bonuses and employer’s pension contribution, where appropriate.

Capital Gains Tax

The current CGT rate of 10% and 20% (residential property 18% and 28%) is payable by taxpayers in basic rate and higher rate respectively. The annual exemption for 2020/21 is £12,300. CGT tips include:

• use your annual exemption by crystallising sufficient gains to use up the allowance. If generating gains from shares traded on the stock market, watch ‘bed and breakfasting’ and matching rule for shares
• ook at your share portfolio if some of the shares have become valueless: you may be eligible for Negligible Value Claim against your income which is better than capital loss
• if you had incurred any capital losses since 2016/17 but no formal claim is submitted yet, then the deadline is 5 April 2021 (4 years after the end of the tax year of the loss)
• if clients are considering selling or gifting their businesses, they may be eligible for Business Asset Disposal Relief (formerly known as entrepreneur relief)
• before selling a sole ownership property, consider transferring it in the joint name of the spouse or civil partner to use two annual exemptions. However, you may need to seek good advice for other related implications
• invest in capital-producing rather than income-generating assets
• employers considering share schemes for staff should consider approved schemes which attract CGT rather than income tax treatment.

Utilise IHT exemptions

• £3,000 per tax year may be gifted. The exemption for the previous tax year may be used if not already done so
• small gift exemptions – unlimited number of small £250 gifts as long as the recipient is a different person each time
• marriage exemptions – £5000 to children, £2500 to grandchildren

And finally, New Tax Year Eve seems to come around quicker every year! Actually, this year, it does, as the end of the tax year falls on Easter Monday. Therefore, for many, the last working day of the 2020/21 tax year will be Thursday 1 April 2021 – something to be aware of when planning your yearend tax planning.

Bounce Back Loans

Bounce Back Loan borrowers will now have the option to tailor payments according to their individual circumstances with the option to delay all repayments for a further six months.

Pay as You Grow will be available to over 1.4 million businesses, which collectively took out nearly £45bn through the Bounce Back Loan Scheme.

The Treasury’s Pay as You Grow repayment flexibilities will enable borrowers to tailor their repayment schedule, with the option to extend the length of their loans from six to 10 years (reducing monthly repayments by almost half), make interest-only payments for six months or pause repayments for up to six months.

The Chancellor has now extended the flexibility of the third option, which will now be available to all from their first repayment, rather than after six repayments have been made. This will mean that businesses can choose to make no payments on their loans until 18 months after they originally took them out.

The government has confirmed that lenders will reach out to borrowers to provide information on repayment schedules and how to access flexible repayment options.

VAT Payment Deferral Scheme

HMRC have announced the VAT Payment Deferral Scheme. In order to take advantage of the new payment scheme businesses will need to have deferred VAT payments between March and June 2020. They will now be given the option to pay their deferred VAT in equal consecutive monthly instalments from March 2021 interest free.

Businesses will need to opt-in to the VAT Deferral New Payment Scheme. They can do this via the online service (Government Gateway), this scheme closes on 21 June 2021.

Businesses can spread their payments with two to 11 equal monthly instalments, interest free. Payments can start from March 2021 and the earlier businesses opt-in the more instalments are available to help spread the cost and provide further support.

Eligible businesses that are unable to use the online service can ring the HMRC Coronavirus Helpline on 0800 024 1222 to join the scheme until 30 June 2021. See more at – https://www.gov.uk/guidance/deferral-of-vat-payments-due-to-coronavirus-covid-19

See Full LDF Accountancy Budget Report Here