Now that, like millions of other small business owners, directors, freelance contractors and self-employed traders in the UK, your Self Assessment tax return has been filed for another year, it’s worth thinking about the end of the next tax year and what you can do to plan a tax-efficient finish.
The tax returns just submitted in January related to income and gains in the tax year 6 April 2012 to 5 April 2013. The next tax year actually ends on 5 April 2014 and now is the time to act to take advantage of certain limits that you can use before the deadline is up.
It makes sense to have a look at your income to assess if you are likely to breach any of the key thresholds by 5 April – the high rate tax threshold (£41,450) where you start paying tax at 40%, the personal allowance threshold (£100,000) beyond which you lose your £9,440 tax-free allowance, or the additional rate threshold (£150,000) where you start paying tax at 45%. If so, you may wish to keep some money in the company, rather than withdrawing it, or make an investment in one of the options below to reduce your tax bill and keep more of your hard-earned cash in your own hands.
One of the most tax efficient investments you can make is into a pension – the income is tax free and the contributions can be offset against your tax bill for the year in which they were made. You can make contributions personally, or through a limited company if you operate one and you can make use of your entire annual tax-free allowance, right up to the end of the year.
Another option for using any surplus funds in a tax-efficient way, is to invest in a tax-free ISA. Again, there’s a limit to how much you can invest in an ISA, £11,500 per year currently and you have until 5 April each year to do so and to use the allowance in full.
Other things to look at if you’re a small business owner include maximising any investment in business assets before the end of the tax year, to take advantage of the annual investment allowance, which allows you to offset investment against your corporation tax bill.
Finally, if you got caught by the child benefit tax, you can’t do much about benefits you’ve already received but now is the time to make a decision about how you are going to manage this going forward. If either you are or partner earn £50,000 or more in a given tax year and you have children, the child benefit you receive will be taxed and if the highest earner received £60,000 or more, it is repayable completely (the income calculation includes all forms of income – e.g. salary, benefits, dividends and rent but is adjusted for pension contributions and similar items). If you earn more than £60,000, the decision really is whether to tell HMRC you want to stop receiving child benefit, or whether to keep collecting it but put it in an interest bearing account, so you can keep the interest when you pay it back as part of your self assessment tax. For earners between £50,000 and £60,000, it’s worth keeping the allowance but making sure again that you keep some of it to be paid back at the end of the year, rather than get caught out – the HMRC website has a handy calculator for this.
Don’t hesitate to contact us if you want further advice – we strongly recommend that investment decisions should only be made in conjunction with a professional financial adviser.