Michael Lansdell from Lansdell & Rose Chartered Accountants talks this month about last minute tax planning for 2015/2016 tax year.
The coming months are crucial for tax planning. With just 2 months remaining in this tax year (15/16) there are still opportunities to ensure you won’t be paying over the odds in tax come next January (17). It’s also a great time of year to get planning for future tax years, ensuring your accounts and tax process is efficient and streamlined.
The views expressed in this article are specifically those of Lansdell & Rose Accountants.
(1) Maximise your dividends before April 16
There is a big change to dividend tax from April 16. The tax credit previously available on dividends is to be abolished and instead a £5,000 tax-free limit introduced.
For those receiving dividends of under £5k per year, this change is likely to benefit. However, the majority of dental and medical professionals who use a limited company structure to trade, will find it isn’t so profitable when using dividends as the main way to draw income from the company.
In short, an additional 7.5% will be added to each tax bracket, after the initial £5k tax-free amount.
Read more – How the new dividend tax rules affect you
Consider maximising your dividends BEFORE April 2016 to reduce overall tax.
(2) Give funds to your spouse
Because of recent changes for high earners, those with income of between £100,001 and £121,200 result in paying up to an effective tax rate of 60%. This is because the personal allowance for high earners reduces by £1 for every £2 of income in excess of £100k.
If your income falls between these figures, consider giving money to your spouse, in yielding assets, to reduce your own overall income below £100k. Also suitable if your income is over £150,000, as a means to bring your tax threshold below the top rate of tax, currently 45%.
(3) Swap salary or bonuses for tax-free benefits
Some employers will offer a Salary Sacrifice scheme to enable employees to take benefits-in-kind or pension contributions instead of salary increases or bonuses.
Certain benefits will have their own tax implications but others, such as payments into a pension plan, may enable the salary to be kept under the £100k threshold and save tax and NI, in many cases for both employee and employer.
It is worth exploring this with your employer, if you are salaried. Remember, if you are a director of your own limited company then you are an employee and the same rules apply to your own tax position.
For high earners additional financial planning is required after this tax year. If net income exceeds £110k pension contributions made by employers as part of a Salary Sacrifice will be assessed to ensure the individual’s gross income doesn’t exceed £150,000. For this year though, it’s all systems go, so there could still be time to negotiate a win:win.
(4) Claim Wear & Tear allowance on furnished lettings
The Wear & Tear allowance is available on fully furnished lettings at 10% of net rents. This is the last year that this tax allowance will be available to landlords though – from 16/17 tax relief will only be claimable on actual expenses for property repairs and renewals.
Make the most of it in this tax year, as this tax relief is valued by many landlords as a way to legitimately reduce their tax bill for Land & Property
(5) Maximise the tax relief on your buy-to-let
The rules for claiming tax relief on buy-to-let mortgage interest are changing in April 2017, capping the tax relief available to the basic rate of tax, currently 20%. This will be phased-in full by 2020. For higher rate and top-rate tax payers this could pose a problem.
In certain circumstances, it may be beneficial to release substantial equity held in a property by remortgaging to a higher value loan. This not only free-up funds for reinvestment elsewhere, but also increases the mortgage, and therefore the amount of claimable tax relief.
Naturally, it is important to remember that the mortgage will need to be paid off upon any property sale, and, reducing the overall gain. Higher mortgage costs result in lower profits to extract too. However, with a small window of opportunity available between now and April 2017, this type of tax planning could suit some property investors who wish to diversify their investments.
(6) Pay the maximum into your ISA’s
ISA’s and JISA’s are free from income tax and Capital Gains Tax (CGT) and most doctors and dentists choose to maximise their allowances each year. The ISA allowance in 15/16 is £15,240 and for a JISA it’s £4,080.
Consider utilising these allowances for your whole family. If you are considering buying a property, then the Help-to-Buy ISA is worth exploring to get a 25% cash injection from the government – T&Cs apply.
(7) Maximise your business expenses
It sounds obvious, but this simple tax-planning method is frequently missed by doctors and dentists due to poor record-keeping. Maximise the tax relief you claim against your business income by reducing your profits and you will pay less tax.
Ensuring you have a suitable electronic system to record income and expenses is vital for reporting and to ensure things don’t get missed or valuable tax savings, lost.
There’s more…
Those are our top 7 last minute tax planning points for 2016.
There are many more though, including:
- Rearranging investments to ensure a tax-free return or a capital return, to avoid paying income tax on dividends
- Switching your company cars
- Giving to charity
- Make tax-free pension contributions
- Assess any losses and roll-over relief that can be utilised
Lansdell & Rose can prepare a comprehensive assessment of your tax situation for 2016 and ensure you are maximising your tax position.
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FREE tax estimate and tax assessment for the 2015/2016 tax year.
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Read more tax saving tips from Michael
- How the new dividend rules affect you
- Buy-to-let investors face cuts in tax relief
- Maximise tax relief for CPD & Training
Dental & Medical Financial Services work alongside healthcare specialists to give you access to the best advice. Please call our team today to get connected.