We have just all paid our taxes for the 2021-22 tax year with the new tax year-end the 5 April fast approaching. Now is a good time to stop and reflect on your tax position, to work out if you can make use of any tax planning opportunities, whether this is available to you, your family, or your business.

Firstly, you need to establish where your income streams are coming from. This could be a trade, property or extracting profits from your company or family trust. Where your total income may exceed £50,000 or even £150,000 it would be worth exploring making pension contributions to extend the basic rate and additional rate tax bands, saving tax. Do remember when you withdraw your pension income, it is taxed at your marginal tax rate.

Where you are a shareholder, dividends may present a tax-efficient means of extracting profits from the company. Dividends are taxed at lower rates than employment income and do not attract National Insurance Contributions (NICs) for the company or shareholder. However, dividends are not tax deductible for corporation tax purposes.If you are a shareholder director, excess profits may be paid out as a dividend, salary, or a bonus. Salaries and bonuses are taxed at your marginal rate of tax and will attract both employee and employer NICs.However, unlike dividends these will be deductible for corporation tax purposes.

Where you have an unincorporated trade, looking at prior salaries and the share of profits can remunerate family members appropriately.

I present various opportunities and reliefs available to be tax efficient below.

Income Tax

Unincorporated business profits are taxed on the individuals involved at their marginal rates. Farming businesses can potentially take advantage of Farmers Averaging, which is restricted to farming profits only, and spreads these profits over two or five years, with the intention of smoothing the peaks and troughs of tax payment cashflow, and in some cases even generating a refund. Farmers Averaging is not available for contract farming businesses; where profits prepared on a cash basis; or in the final year of trade, please discuss the income tax impact of any intentions to cease farming with your accountant.

Capital allowances can be claimed on expenditure on certain types of assets used in your business to reduce your taxable profits, so the timing of these can be useful and bringing forward any planned capital expenditure in years of high profits will be beneficial. It is worth noting that relief in the long run is only given on the reduction of the value of assets purchased, because, in the year they are sold the proceeds potentially increases taxable profits. See below a reminder of the capital allowance regime:

• The Annual Investment Allowance (AIA). 100% relief is given for the expenditure on most types of plant and machinery and many fixtures in buildings, there is a limit of £1 million per financial year.
• Writing Down Allowance (WDA). Any other expenditure eligible for capital allowances, for example the purchase of motor vehicles generally attracts an annual capital allowance of 18% or 6% (depending on the nature of the expenditure) on a reducing balance basis.
• First Year Allowance (FYA). 100% relief is given for qualifying ‘special rate’ assets acquired. This applies to electric cars and other energy efficient equipment.
• Structures & Buildings Allowance (SBA). 3% relief per annum is given for expenditure on new non-residential buildings (including new conversions and renovations).

Where income is expected to be between £125,140 and £150,000 in 2023/24, bringing income into 2022/23 could mean the difference between being taxed at 40% in 2023, rather than being taxed at 45% in 2023/24, discuss the possible ways, depending on individual circumstances, with your accountant.

For income received from a company it should also be noted, from 6 April 2022 the rates of income tax applicable to dividend income have increased by 1.25%. The dividend ordinary rate is 8.75%, the dividend upper rate 33.75% and the dividend additional rate and the dividend trust rate 39.35%. Coupled with the stepped reduction in the tax-free dividend allowance in 2022/23 of £2,000, 2023/24 a £1,000 and £500 in 2024/25 making future extraction of profits from a company by way of dividend less favourable. You may want to accelerate payments of dividends if there is scope to do so, last chance opportunity for director shareholders to take advantage of the current higher rate dividend allowance and additional rate threshold.

Everyone has a personal allowance (PA), now frozen, avoiding wasting the family/household PA takes on new importance. You may be eligible to make a transfer of what is called Marriage Allowance to your spouse, a tax saving up to £252; preserve your own PA, as over £100,000 adjusted net income your PA is clawed back and lost entirely when your adjusted net income reaches £125,140. How to sidestep this 60% tax trap? married couples may have the opportunity to redistribute income by transferring income producing assets, if in business with your spouse a review of profit sharing ratios or indeed increasing a spouses wages whom works in the business. Any action of this nature needs to be commercially justifiable and reflect the underlying running of the business. Prior discussion with your advisors is a necessity to make sure you are fully compliant with relevant legislation.

By managing your pension contributions (out of disposable income) could cut your tax bill. Well timed personal pension contributions can be made to increase the amount of income that is taxed at the basic and possibly additional rates, including, and depending on income and pension contribution levels mitigate being taxed at 60% tax as above. A tactical pension contribution can also avoid the claw back of Child Benefit for those earning between £50-60k income in conjunction with a review of the distribution, if discretionary, of income between you and your spouse.

Lastly, it is worth noting where donations are made to charities if you claim Gift Aid on the payments this can extend your basic rate band and tax more income at the basic rates.

Capital Gains Tax

Disposals of capital assets forms part of your Self-Assessment and is taxed alongside your income tax. The major change to the Capital Gains Tax regime from 6 April 2023 is the change to the Annual Exempt Amount. This is the amount of capital gains you can make tax free; this has reduced from £12,300 to £6,000. So, if you are thinking of disposing of any assets it would be beneficial to bring the disposals forward to before 5 April 2023 to make use of the additional allowances.

Where you are married it is possible to transfer assets between you and your spouse on a no gain/no loss basis to make best use of both of your tax free Annual Exempt amounts. Transferring assets may also be advantageous allowing access to the capital gain being taxed at a lower rate of tax at 10% if a spouse is a basic rate tax payer as opposed to 20% tax for a higher rate tax payer. Residential property gains are taxed at either 18% or 28% depending on your level of other income, so it is worth considering the timing of these disposals to make use of the lower rates where possible.

There are special rules for the sale of residential properties, if you are disposing of a residential property, you will need to report the disposal to HM Revenue and Customs and pay the tax within 60 days of the day of completion.

It is worth noting that Entrepreneurs Relief is now known as Business Asset Disposal Relief (BADR). Assets which qualify as business assets, and you meet the criteria for BADR can be taxed at 10% up to the £1 million allowance.

Corporation Tax

For UK companies, one of the biggest taxes to be planning for is the increase to corporation tax. From 1 April 2023, the Corporation Tax main rate will be increased to 25% for profits over £250,000.Companies with profits of £50,000 or less will continue to pay Corporation Tax at 19%. Companies with profits between £50,000 and £250,000 will pay tax at the main rate reduced by a marginal relief providing a gradual increase in the effective Corporation Tax rate. If your company is looking to dispose of chargeable assets within the next few years, they should consider bringing forward the date of the disposals to before 1 April 2023 to benefit from the lower rate, if this works to the company’s best advantage.

If you know your company is looking to have higher profits this year, coupled with the tax rate increase, now is a key time to plan any large business and capital expenditure to ensure that you are not only caught with increased profits but also the increased tax rate at the same time.

With the trend towards increased corporation tax rates, deferring expenditure and advancing income to accelerate tax payments may be more appropriate depending on circumstances as creating or increasing a loss may be preferred.

In addition to the capital allowances mentioned earlier in this article, companies can take advantage of the ‘super-deduction’. This allows companies to claim 130% capital allowance relief on the acquisition of new plant and machinery. It is worth noting that new means first owner, so assets which are purchased and have been used by a previous owner do not qualify. However, it is important to note that plant and machinery is unused and not second-hand even if it has undergone some limited use for the purposes of testing, delivery, or demonstration and therefore, would qualify as new.This relief is only available until 31 March 2023 so timing purchases to take advantage of this will be key depending on your planned plant and machinery expenditure and forecasted profits to 1 April 2023 and the following year.

Use of current year losses needs careful consideration as there is opportunity to carry losses back to reclaim tax previously paid which is a cashflow advantage or losses can be carried forward, relief could potentially be obtained at a maximum of 26.5% (where profits fall into the marginal rate band) as opposed to 19%. The cashflow considerations of carrying forward the loss should be factored into your loss utilisation decision.

Inheritance Tax

There are many factors to consider when planning for inheritance tax, but annually to make the most of the following reliefs: -

• Gifts between spouses or civil partners are tax free
• Annual Exemption £3,000 of gifts to anyone
• £250 small gifts allowance to anyone who has not benefited from your Annual Exemption
• £5,000 marriage gift allowance for gifts to your children, £2,500 for grandchildren and £1,000 for anyone else

Inheritance tax planning needs to have much more consideration to take advantage of planning opportunities for minimising Inheritance tax on your estate, we are very happy to assist you with your needs.

VAT

Although not a planning point it is worth being aware of the new VAT penalty regime which applies to all businesses, even those in a repayment position.

For VAT accounting periods starting on or after 1 January 2023, late submission penalties apply if you submit your VAT Return late. This includes nil or repayment returns. The VAT default surcharge is being replaced by new penalties for returns that are submitted late and VAT which is paid late. The way interest is charged is also changing. For VAT accounting periods starting on or before 31 December 2022, the VAT default surcharge still applies.

To avoid late submission penalties, you must send a VAT Return by the deadline for your accounting period. Your accounting period is the period for which you need to send a return to HM Revenue and Customs, for example, quarterly. Late submission penalties work on a points-based system. For each return you submit late, you will receive a penalty point until you reach the penalty point threshold.

When you reach the threshold, you will receive a £200 penalty. You will also receive a further £200 penalty for each subsequent late submission while you are at the threshold.

Conclusion

Taking advantage of reviewing your tax affairs pre year-end 5 April 2023 gives the best scope for tax efficiency, however as the adage goes “do not let the tax tail wag the dog!”

Tax planning should not always be left in a mad rush at the end of the financial year but under constant review throughout.

Written by Rosie Bennett FCCA

Rosie Bennett FCCA

Manager

Rosie joined Evolution ABS in 2012 and became ACCA qualified in July 2017.

When Rosie isn’t working, she is very active within Young Farmers and is currently the National Federation of Young Farmers Chairman.

She also enjoys showing Holstein Dairy Cattle, helping her parents on their dairy and poultry farm and cycling.

T: 01823 462908

E: rosie.bennett@evolutionabs.co.uk