Why tax planning is important?
Tax planning is important when thinking about your future financial well-being. When creating any form of a financial plan, you need to factor in the tax implications. Getting this step right can not only avoid nasty surprises further down the line but can even reduce the amount of tax you have to pay, thereby increasing your disposable income.
Being tax efficient requires knowing about all the different taxes that apply to different situations. For example, with property investments you are only subject to capital gains tax if / when you sell or transfer the property, so what is the best way to handle that sale/transfer in order to minimise your tax liabilities?
Using your tax allowances
Every UK taxpayer has certain tax allowances every year, for example on Income Tax, Capital Gains Tax, Dividend Income and others. The first step in your tax planning needs to be looking at these allowances and making sure you are utilising them.
If you are making the best use of them then you are already minimising your tax burden. You may also be able to claim certain expenses as tax deductions from your income before it is assessed for tax. If you feel that you are paying too much tax, particularly if you are in a higher tax bracket, it would be worth your time to check whether there are any allowable deductions you haven’t yet claimed for.
Tax planning and investments
Most people want to invest money in one way or another. They may have savings investments either as part of a larger plan or for a specific purpose such as a house purchase. They may have retirement plans, which could be a structured pension plan, or may include other elements. Everyone’s personal finances are unique, and while there are general guidelines that anyone can follow, the bigger the size of the investment, the higher the potential for tax savings, and the greater the need for personalised expert advice.
UK laws allow certain tax exemptions on income derived from savings and investments. For example, the first £1,000 of interest earned for a basic rate taxpayer is tax-exempt each year. For many smaller investors, this means they won’t pay tax on their savings. Contributions to a pension plan attract certain tax benefits, and anyone looking to maximise their investment potential while reducing their tax liabilities should be making full use of these.
Tax planning to reduce your income tax bill
There are a number of measures you can take to keep your tax bill to a minimum without employing a tax specialist. Not all of them apply to all individuals, but here are a few common steps. Firstly, check your tax code. The majority of UK taxpayers will have a code of 1257L (tax year 2021/2022) meaning they are entitled to £12,570 income before paying any tax. For some people, the code may be higher or lower, but whatever it is, make sure it is correct for your situation so that you are not presented with an unexpected bill at the end of the year.
Claim full relief on pension contributions by paying in as much as you can to get the full benefit of personal pension contributions (if applicable) and remember to claim the tax relief on your tax return. If you are married or in a formally recognised partnership, then you should be examining your tax situation as a couple. There are opportunities to be tax-efficient, by claiming the ‘Marriage Allowance’ and also by considering who owns which assets. If you have children and are in a higher income bracket you may find yourself subject to high-income child benefit tax charges.
But pension contributions and charitable donations can help to offset this liability. All charitable donations can attract tax relief if the gift aid box is ticked. Most people are familiar with the gift aid scheme, whereby a charity or community organisation can claim an extra 25p for every £1 donated by a UK taxpayer. But you can also claim tax relief yourself on these donations. You need to keep clear records of your donations, and either enter them on your tax return or ask HMRC for a form P810.
Tax planning for other taxes
You have an annual allowance for Capital Gains Tax. It may be worth, for example, cashing in an investment and then reinvesting the money elsewhere, rather than leaving it to accrue for longer. This means you can avoid paying CGT on the increase in value if that increase falls below the annual allowance (tax year 2021/2022- £12,300). While planning your financial future, you should also pay attention to matters such as potential inheritance tax, which can reduce the value of assets you leave to your heirs.
Tax Planning for Business
Tax planning is not just for individuals. Business owners should also be paying attention to their potential tax liabilities. This planning will ideally begin before the business is even set up, as the first issue to examine is your business structure. This will affect both the credits you’re eligible for, and your liabilities. For example, if your business is a sole trader or partnership, then for tax purposes you are classified as self-employed. Directors of limited companies are considered to be employees.
However, a limited company has other taxation requirements, with additional paperwork to file. If you’re unfamiliar with the differences, then it is worth getting expert advice to be sure you’re considering the pros and cons of each structure and are fully informed on your legal responsibilities, before making a potentially costly decision.
Passman Leonard offers great value, fast, accurate accounting support to individuals and small-medium-sized businesses from all industries in and around London. Our qualified, diverse team is here to take the strain. You can find out more about Tax efficiency click here or email us at info@passmanleonard.co.uk
