2021 Tax Year End Planning - Top Tips
Easter Monday is not only the end of a long bank holiday, it’s also the end of the tax year. Make sure you plan accordingly, so you can improve your nest egg before Easter 🐤 Please see our top tips below:
1. Income Tax Thresholds - £50k and £100k
These are crucially important to understand, to ensure you don’t pay more tax than you need to. Even if you benefit from a 0% tax rate on certain allowances, say the £2k dividend allowance, the £2k still counts towards these £50k and £100k thresholds.
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.
Between £50k and £60k, your child benefit starts to get taken away for you or your partner. If your child benefit is an annual £1,820 and your income is £60k, you have to repay (or not claim) £1,820. This amounts to a further tax of 18.2% on top of your dividend tax of 32.5%, just over 50% in total. This is expensive!
Similarly, if you need to take more than £60k and are close to the £100k threshold, you may want to stay under the £100k threshold where you start to lose your tax free personal allowance. For every £1 of dividend taken between £100k and £125k, the effective dividend tax due is 48.75%, rather than 32.5%. For high earning employees the effective income tax rate is 60%!
2. The Importance of Pension Contributions and Charitable Gift Aid Donations
The introduction of the £50k and £100k thresholds has shown how important pension contributions and gift aid 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’re thinking of paying pension contributions or gift aid donations, pay them at the optimal time to maximise your tax reliefs. Remember they need to be paid on or before 5 April 2021 to save income tax.
As a company owner, your pension contributions will probably be made as company contributions and to save corporation tax these must be paid before your accounting year end. If your company year end is 31 March 2021, pay them on or before 31 March 2021.
As a high earning employee, say, on a salary of £110k, paying £8k into a pension scheme saves you £6k of income tax! This is 60% of £10k being the £8k you paid, grossed up by 20%, or £2k, paid direct by the government into your pension pot. The net effect on your income tax return is £4k to allow for this £2k paid in the background.
As a sole trader or partner, if you have a good year, you’re not able to defer income as easily into another tax year so pensions and gift aid donations may be even more important. Similar considerations apply as above.
Take IFA advice before deciding if, when and where to invest.
3. Planning To Expand?
As a sole trader or partner, if you have some larger costs to incur or equipment to buy, you might want to incur these costs before 5 April 2021 so you can claim tax relief in this tax year.
If you’ve just started up so you're making losses and paid tax elsewhere in this tax year or any of the previous three tax years, you should be able to claim an income tax refund. Therefore, if you have some costs to incur or equipment to buy, incur them before 5 April 2021 to increase your tax loss and therefore your tax refund.
The meaning of ‘incur’ isn’t necessarily paying out cash before 5 April 2021, so check the rules if your cashflow is tight.
Similarly, as a company owner with a 31 March 2021 accounting year end, bringing forward significant costs will save you corporation tax. However, for plant & equipment, you may save more tax by making the investment in your next accounting period from 1 April 2021 to benefit from the recently announced super-deduction of 130%.
4. Planning To Invest?
If you’re planning to support unrelated growing limited companies by investing in shares, remember to consider whether S/EIS income tax reliefs are available to you. Each £10k invested might save you £3k or £5k of income tax. Investing on or before 5 April 2021 should bring forward your tax saved by a year.
5. Marriage Allowance, Trivial Benefits, Annual Parties
Ensure you've not missed out on these during the tax year. They can add up! For example, marriage allowance can save up to £250. Perhaps even treat your employees to a virtual Easter party, assuming the £150 per person wasn't used up at Christmas!
As ever, remember to take appropriate professional advice before taking or refraining from any action so that your tax and business situation may be assessed in full.